Discretionary Loan Loss Provisions, Earnings Management and Capital Management in Banks

Abstract

The two past decades have been marked by a multitude of financial scandals (the Enron failure, WorldCom. etc.) mainly caused by the practices of earning management that have challenged the financial reporting quality disclosed. The purpose of this research is to study the determinants of discretionary loan loss provisions in banks. To achieve this objective, we selected a sample of the main Tunisian banks over the period from 2001 to 2014. The estimation results shows that the banks are opting for earnings management practices through the discretionary loan loss provisions in order to align with international standards, in particular with respect to regulatory capital. In opposition, we found a non-significant relationship between earnings before taxes and provisions and discretionary provisions.