Abstract
In the recent past, the financial crisis has shown important lacks in the EU regulation relating to the banking sector, making the introduction of a unified regulatory framework necessary. Since June 2009 the European Council has recommended a “Single Rulebook”, that is a unique and harmonizing discipline applicable to all financial institutions in the Single Market, become effective on January 2014. This prudential discipline requires much more minimum capital, liquidity and information transparency and it defines format and minimum standards of contents.The aim of this research is to investigate the relation between the new mandatory disclosure and earnings management policies in banking sector realized through Loan Loss Provisions (LLP), the component of income statement mainly subject to manipulations, especially in form of earnings smoothing. Because the new integrated regulatory framework requires a more transparent disclosure, we expected that accruals manipulation (basically LLP) could be discouraged. The empirical analysis is based on a sample of 116 listed European banks over the period prior (2011-2012-2013) and after (2014-2015-2016) the effective date of the Single Rulebook. The evidence confirm our hypothesis suggesting that this banking reform discourages earnings manipulation and improves earnings quality, making financial reporting more useful for investors. The results are important to the regulatory institutions (such as European Union and European Central Bank) supporting more stringent discipline introduced by Basel III.
Highlights
Financial reporting assumes the key role in satisfying the information needs of stakeholders
The loan loss provisions are in mean 0.85% of total assets ranging from 0.02% to 4.62%, whereas Non-performing loans count on average 5.9% on the total assets reaching a maximum of 49.84% for a Grecian bank
As revealed in some studies (Kim & Kross, 1998; Dong et al, 2012; Jin et al, 2016), we find that larger banks are negative related to Loan Loss Provisions (LLP)
Summary
Financial reporting assumes the key role in satisfying the information needs of stakeholders. The recent financial scandals (Enron, Parmalat, Worldcom) have strained the credibility of financial statements generating the interest of the economic and financial community in themes such as the accounting policies and, in a broader sense, the earnings quality. For this reason, many countries have developed a set of high-quality rules (Accounting Quality) based on the transparency and comparability of accounting information. It is generally agreed that the more earnings quality the more the reduction of the information asymmetry in the capital market, attenuating the agency problem which derives from an opportunistic use, by the management, of the discretion (Healy & Palepu, 2001)
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