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

Author

Listed:
  • Malik Amina

    (PhD Scholar, National Defence University, Islamabad, Pakistan.)

  • Din Shahab Ud

    (Associate Professor, Management Sciences, Karakoram International University, Ghizer campus, Gilgit Baltistan, Pakistan.)

  • Shafi Khuram

    (Associate Professor, Management Sciences, COMSATS University Islamabad, Pakistan E-mail: HYPERLINK “mailto:shafikhuram@yahoo.com”)

  • Butt Babar Zaheer

    (Post Doctorate Research Fellow, Tohoku University of Community Service & Science, Japan.)

  • Aziz Haroon

    (Senior Accounts Officer, All Pakistan Textile Mills Association.)

Abstract

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.

Suggested Citation

  • Malik Amina & Din Shahab Ud & Shafi Khuram & Butt Babar Zaheer & Aziz Haroon, 2022. "Accounting Discretion, Loan Loss Provision in Financial Distress: Evidence from Commercial Banks," Zagreb International Review of Economics and Business, Sciendo, vol. 25(2), pages 1-18.
    • Handle: RePEc:vrs:zirebs:v:25:y:2022:i:2:p:1-18:n:1001
    DOI: 10.2478/zireb-2022-0012
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    More about this item

    Keywords

    Financial distress; Z-Score; Discretionary loan loss provisions and Non-discretionary loan loss provisions;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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