Discretionary choices of commercial banks in Bangladesh: an earnings management approach

Abstract

ABSTRACT Purpose- The study aims to trace out the factors contributing to earnings management practices in the commercial banks of Bangladesh. Methodology- The study used secondary data sources from the published audited annual reports of 32(Thirty-Two) commercial banks of Bangladesh from the year 2005-2018 of 425 observations. The study conducted preliminary diagnoses like normality, unit root, and Granger causality test to identify the data's nature and response. Moreover, the study performed the heteroscedasticity test, autocorrelation test, and fixed and random effect of the model to confirm the output's accuracy. Based on the above statistical diagnosis, the study has selected Robust Least Square (RLS) regression model to show the practice of discretionary choices in the banking sector of Bangladesh. Following Kanagaretnam et al.’s (2003), this study also derived discretionary and non-discretionary accruals from loan loss provisions. Findings- This study considered several factors like bank size (SIZEit), loan to deposit ratio (L/DEPit), non-performing loan to previous year’s total loan ratio (NPLRit-1), changes in non-performing loan to current total loan ratio (∆NPL/TLit), and changes in total asset to total loan ratio (∆TA/TLit) to show the effects on banks’ earnings management. It is found that SIZEit, NPLRit-1, ∆NPL/TLit and ∆TA/TLit have a positive and significant (p<0.01; p<0.05) effect on Bank‘s discretionary choice. However, L/DEPit positively affects earnings management but is statistically insignificant. Conclusion- Despite being a legal tool, earnings management is often involved with the controversy of being an unethical practice. However, there has been a lot of research on tracing earnings management in corporate firms based on discretionary and non-discretionary accruals. The study contributes to the existing literature and tries to explain the role of discretionary accruals in banks performance mostly in the submerged economy. Along with identifying significant variables, the study has tried to explain the implication of these findings suggesting some crucial steps that may help reduce the practice of earnings management as earnings management distorts the banks' financial position or any firm and misleads the investors. Keywords: Earnings management, discretionary accruals, panel data, commercial banks, Bangladesh. JEL Codes: C22, C23, G21