The impact of corporate governance mechanisms on EU banks’ income smoothing behavior

Abstract

PurposeThis paper aims to investigate the impact that governance mechanisms have on European Union ‘banks income smoothing behavior.Design methodology/approachThe authors examine the impact that corporate governance mechanisms included in European Commissions’ proposals regarding the improvement of corporate governance mechanisms (Green Paper) have upon European Union banks’ accounting policy decisions regarding the level of loan loss provisions (LLPs). In addition, the authors examine whether banks’ capital structure operates as an effective internal corporate governance practice. The authors investigate the association between certain corporate governance characteristics and the level of LLPs for a sample of 98 banks from 23 European Union countries for the period of 2010-2013, in the aftermath of the 2008 financial crisis. To test the hypotheses, a multivariate regression model is run. Similar to previous research, the authors use ordinary least squares analysis to test the results.FindingsEmpirical findings provide evidence that there is a positive association between LLPs and accounting income, implying the existence of an income-smoothing pattern of provisions. In addition, the results suggest that banks managers’ decision to smooth income may differ with regard to the board structure, the level of leverage and the provision of disclosure for remuneration for chief executive officer.Originality/valueThe findings of this study contribute to the existing literature concerning banks’ income smoothing behavior. These findings can be useful to regulators, as the authors provide some evidence regarding the effectiveness of the European Union corporate governance framework.