Explore the vast range of titles available.

We investigate the role of loan loss provisions in analysts’ decision to follow banks. We find that abnormal loan loss provisions (ALLP), regardless of whether it is income-increasing or income-decreasing, reduce analyst coverage. We interpret this effect with the finding that the greater magnitude of ALLPs decreases the accuracy and increases the dispersion of analysts’ forecasts. In addition, the volatility in ALLPs leads to the decrease in analyst coverage as well. We also find a pecking order for lead analysts’ decisions in a noisy information environment. Lead analysts prefer to follow financial institutions with more accurate loan loss provisions first, then with more positive (incoming-decreasing) ALLPs, and are less likely to follow those with negative (income-increasing) ALLPs. Our findings are robust to endogeneity concerns and indicate that lead analysts are deterred from more aggressive bank earnings management.

Purpose The purpose of this paper is to examine the determinants of the use of loan loss provisions (LLPs) to smooth income by banks in South Africa. More specifically, the authors examine the influence of ownership, IFRS disclosure rules and economic fluctuation on the income smoothing behaviour of South African banks while controlling for the traditional determinants of bank income smoothing via LLPs. Design/methodology/approach The study employs fixed effect regression methodology to estimate the determinants of discretionary LLPs. Findings The authors find that South African banks do not use LLPs to smooth income when they are: under-capitalised, have large non-performing loans and have a moderate ownership concentration. On the other hand, income smoothing is pronounced when South African banks are rather more profitable during economic boom periods, well-capitalised during boom periods and is pronounced among banks that adopt IFRS and among banks with a Big 4 auditor. The authors also find that banks use LLPs for capital management purposes, and bank provisioning is procyclical with economic fluctuations. Practical implications Bank supervisors in South Africa should monitor the bank provisioning practices in South Africa closely to ensure that LLPs are not used as a substitute for bank capital. Banks in South Africa should not use sufficient provisioning as a substitute for sufficient bank capital. Second, the evidence for procyclical bank provisioning shows that provisioning by South African banks reinforce the current state of the economy and might compel bank supervisors in South Africa to consider the adoption of a dynamic provisioning system that is already adopted by bank supervisors in Spain, Peru, Uruguay, Colombia and Bolivia. Originality/value Bank income smoothing is an important issue because it has implications for banking stability and accounting transparency. There are few studies on bank income smoothing for emerging economies particularly in Africa where there are substantial differences in ownership and accounting rules. This is the first South African study to examine the influence of disclosure rules, ownership and economic cycle fluctuations on bank income smoothing behaviour via LLPs.

We show that maturity transformation does not expose banks to interest rate risk—it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is also insensitive, that is, to lend long term at fixed rates. As predicted by this theory, we show that banks closely match the interest rate sensitivities of their interest income and expense, and that this insulates their equity from interest rate shocks. Our results explain why banks supply long-term credit.

This paper investigates the impact of bank size and competition on earnings volatility and insolvency risk using quarterly data for commercial banks operating in the Turkish banking industry for the period 2002Q1–2012Q2. The main result of the paper indicates that bank size and earnings volatility are negatively related, suggesting that larger banks are less risky. The results also indicate that competition measured by the Boone indicator increases earnings volatility. The results further suggest that higher capitalized banks, banks with a higher share of non-interest income in total income and efficient banks face lower earnings volatility. Finally, insolvency risk measured by Z -score and bank size are positively related, suggesting that larger banks are more stable.

We examine the relation between four dimensions of national culture and earnings quality of banks using a sample of banks from 39 countries. Our main analysis, which focuses on the pre-financial crisis period 1993-2006, indicates that banks in high individualism high masculinity, and low uncertainty avoidance societies manage earnings to just-meet-or-beat the prior year's earnings. In tests of income smoothing through loan loss provisions, we find that banks in high individualism, high power distance, and low uncertainty avoidance societies report smoother earnings. Our exploratory analysis of the effects of national culture on accounting outcomes during the financial crisis period 2007-2008 indicates that cultures that encourage higher risk-taking experienced more bank troubles in the form of larger losses or larger loan loss provisions.

The quiet life hypothesis posits that firms with market power incur inefficiencies rather than reap monopolistic rents. We propose a simple adjustment to Lerner indices to account for the possibility of forgone rents to test this hypothesis. For a large sample of U.S. commercial banks, we find that adjusted Lerner indices are significantly larger than conventional Lerner indices and trending upward over time. Instrumental variable regressions reject the quiet life hypothesis for cost inefficiencies. However, Lerner indices adjusted for profit inefficiencies reveal a quiet life among U.S. banks.

What is the effect of financial crises and their resolution on banks' choice of liquidity? When banks have relative expertise in employing risky assets, the market for these assets clears only at fire-sale prices following a large number of bank failures. The gains from acquiring assets at fire-sale prices make it attractive for banks to hold liquid assets. The resulting choice of bank liquidity is countercyclical, inefficiently low during economic booms but excessively high during crises. We present evidence consistent with these predictions. While interventions to resolve banking crises may be desirable ex post, they affect bank liquidity in subtle ways: Liquidity support to failed banks or unconditional support to surviving banks reduces incentives to hold liquidity, whereas support to surviving banks conditional on their liquid asset holdings has the opposite effect.

This paper studies the role of credit supply factors in business cycle fluctuations using a dynamic stochastic general equilibrium (DSGE) model with financial frictions enriched with an imperfectly competitive banking sector.Banks issue collateralized loans to both households and firms, obtain funding via deposits, and accumulate capital out of retained earnings. Loan margins depend on the banks' capital-to-assets ratio and on the degree of interest rate stickiness. Balance-sheet constraints establish a link between the business cycle, which affects bank profits and thus capital, and the supply and cost of loans. The model is estimated with Bayesian techniques using data for the euro area. The analysis delivers the following results. First, the banking sector and, in particular, sticky rates attenuate the effects of monetary policy shocks, while financial intermediation increases the propagation of supply shocks. Second, shocks originating in the banking sector explain the largest share of the contraction of economic activity in 2008, while macroeconomic shocks played a limited role. Third, an unexpected destruction of bank capital may have substantial effects on the economy.

We show that a pattern of earnings management in bank financial statements has little bearing on downside risk during quiet periods, but seems to have a big impact during a financial crisis. Banks demonstrating more aggressive earnings management prior to 2007 exhibit substantially higher stock market risk once the financial crisis begins as measured by the incidence of large weekly stock price \"crashes\" as well as by the pattern of full-year returns. Stock price crashes also predict future deterioration in operating performance. Bank regulators may therefore interpret them as early warning signs of impending problems.

Using an international sample of banks, we study how differences in religiosity across countries affect earnings management. Given that religiosity is a major source of morality and ethical behavior, it may reduce excessive risk taking and act as deterrence for earnings manipulations. Therefore, we predict lower earnings management in societies that have higher religiosity. Consistent with expectations, our cross-country analysis indicates that religiosity is negatively related to income-increasing earnings management for loss-avoidance and just-meeting-or-beating prior year's earnings. We also find that religiosity reduces income-increasing earnings management through abnormal loan loss provisions. In additional tests, we document that religiosity increases the information value of bank earnings, with both earnings persistence and cash flow predictability being enhanced by higher religiosity. For the crisis period analysis (i.e., 2007–2009), our evidence shows that banks in countries with higher religiosity exhibit lower probability of reporting asset deterioration and lower probability of having poor performance.