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Non-linear Dynamics in Discretionary Accruals: An Analysis of Bank Loan-Loss Provisions

Author

Listed:
  • Marina Balboa

    (Faculty of Economics)

  • Germán López-Espinosa

    (School of Economics and Business Administration, University of Navarra)

  • Antonio Rubia

    (Faculty of Economics)

Abstract

Several studies have characterized the relation between discretionary accruals and earnings before-taxes to test for the existence of earnings smoothing behaviors. In this paper, we argue that the characteristic response of accruals to earnings is not linear, as the literature has shown. Instead, it is likely to be driven by non-linear patterns since both the incentives to manipulate earnings and the practical way to do so depend, in part, on the relative size of earnings. Using a sample of 9,442 US banks in the period 1999-2008, this paper shows that bank managers tend to use provisions as a smoothing devise when earnings are substantial ('cookie-jar' strategies), engage in earnings-decreasing strategies when losses are relatively large ('big-bath' accounting) and, most of the time, use provisions as an earnings-increasing tool. Hence, it is shown that nonlinear specifications are more informative with regard to the different strategies employed to manipulate earnings.

Suggested Citation

  • Marina Balboa & Germán López-Espinosa & Antonio Rubia, 2012. "Non-linear Dynamics in Discretionary Accruals: An Analysis of Bank Loan-Loss Provisions," Faculty Working Papers 07/12, School of Economics and Business Administration, University of Navarra.
    • Handle: RePEc:una:unccee:wp0712
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    More about this item

    Keywords

    Earnings management; Income smoothing; Multi-way cluster; Panel data; Threshold regression;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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