Determinants of Income Smoothing Practices in Light of the Recent Pandemic: Evidence from Banks in MEA Region

Abstract

This study examined the effects of the recent COVID-19 pandemic on income smoothing practices in the banking sector of Middle Eastern and African (MEA) countries. It examined how global geopolitical risk (GPR) and the bank's internal indicators influenced these practices. Focusing on 175 banks across the MEA region with data spanning from 2018 to 2021. This study employed several econometric approaches, i.e., GMM, 2SLS, MMQR and QRPD, to provide robust estimations. The study's scientific novelty is in its thorough analysis of how COVID-19 stringency and global geopolitical uncertainties uniquely impact income smoothing practices, utilising advanced econometric techniques to capture nuances across different regions. The findings revealed that income smoothness has increased in response to stringent COVID-19 measures such as lockdowns and movement controls, with consistent results across various methods. Additionally, the higher global GPR is associated with increased income smoothness. The study also identified varying impacts of bank-specific factors: bank size, and capital adequacy ratio (CAR), generally show positive effects, while return on assets (ROA), cost-to-income ratio (CI), leverage (LEV), and liquidity (LIQ) often have negative impacts, with some variables displaying minimal significance in different quantiles. Practically, the study offers valuable insights for policymakers and banking sector professionals by highlighting how heightened COVID-19 stringency and geopolitical risks influence income smoothness. This can aid in the development of strategies to manage financial stability and adapt to future economic shocks.