Earnings management and bank risk-taking behavior in Asia-Pacific region

Abstract

The issue of bank risk-taking behavior has regained attention in Asia-Pacific banking sector as banks in this region are facing rising risk and capital costs. This study investigates the association between earnings management and risk-taking behavior in Asia-Pacific banks. We argue that earnings management induces banks to invest in riskier assets to ‘search for yield’ since earnings management increases banks’ capital cost leading to reduction in profitability. Using a sample of 237 listed commercial banks across 13 Asia-Pacific countries and territories in the period of 2001–2017, our research finds that there is a significant positive relationship between earnings management using loan loss provisions and bank risk-taking behavior.