Profit status of microfinance institutions and incentives for earnings management

Abstract

We theorize that for-profit microfinance institutions (MFIs) have higher incentives to use earnings management techniques when compared to their not-for-profit counterparts. Indeed, we show empirically that, when facing a distress period, for-profit MFIs are more likely to recognize impairment loan loss provisions than not-for-profit ones in about 0.8% of assets. This is consistent with the notion that those institutions are employing “big bath” accounting practices. Finally, using the 2008 crisis as an exogenous shock and country-level recessions as an exogenous measure of distress, we replicate our results.