Discretionary Loan Loss Provisions And Earnings Management For The Banking Industry

Abstract

The purpose of the study is to investigate the relation between discretionary loan loss provisions and 6 indicators of bank operating performance for the period 1999-2004 under controlling the type of bank, ownership status and asset size. Besides, we investigate whether bank managers intend to use discretionary loan loss provisions as a means for earnings management. Based on the empirical results from the Taiwan Economic Journal (TEJ) database, the study finds: (1) the two earnings-related variables, namely earnings before loan loss provisions and one-year-ahead earnings, are significantly related to discretionary loan loss provision; (2) non-performing loans is significantly related to discretionary loan loss provisions, but non-performing loans ratio and bad debts coverage ratio are not found to be significantly linked to discretionary loan loss provisions; (3) capital adequacy ratio is not significantly related to discretionary loan loss provisions. Finally, our findings indicate that bank managers may use discretionary loan loss provisions to engage in earnings management when the earnings before loan loss provisions or non-performing loans are at a high level.