Journal Article

Accounting Discretion, Loan Loss Provision in Financial Distress: Evidence from Commercial Banks

Shafi, Khuram, Zaheer Butt, Babar, Ud Din, Shahab, Aziz, Haroon, Malik, Amina

2022

Overview

This study explores the association between earning management practices and financial distress in commercial banks. Earning management is measured through discretionary loan loss provisions and non-discretionary loan loss provisions. Modified Altman’s Z-score has been used as a proxy for financial distress. Panel regression with fixed and random effect has been employed for empirical analysis. The study finds a significant positive association between DLLP, NDLLP and financial distress in terms of the Altman Z-score. In the case of NDLLP, liquidity reduces the probability of financial distress. Whereas, a bank’s SIZE, LEVG and AQ enhance the likelihood of financial distress. The robustness tests were applied to find the association between NDLLP and FD using logistic regression to validate baseline estimates results of the random effect model. The findings of this study have implications for the policymakers, regulators and internal stakeholders to devise effective regulatory measures for well-informed investment decisions.

• Publisher: Walter de Gruyter GmbH,Sciendo,De Gruyter Brill Sp. z o.o., Paradigm Publishing Services,Sveučilište u Zagrebu, Ekonomski fakultet Zagreb
• Subject: Accounting / Banking / Banking industry / Banks / College professors / Commercial banks / Credit risk / Discretionary loan loss provisions and Non-discretionary loan loss provisions / Earnings / Earnings management / Financial distress / Financial distress; Z-Score; Discretionary loan loss provisions and Non-discretionary loan loss provisions / Financial statements / G11 / G21 / G28 / Investment decision / Literature reviews / Loans / Policy making / Profitability / Profits / Provisions / Psychological distress / Random effects / Robustness / Z-Score