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DISCRETIONARY CHOICES OF COMMERCIAL BANKS IN BANGLADESH: AN EARNINGS MANAGEMENT APPROACH

Year 2022, , 1 - 11, 30.03.2022
https://doi.org/10.17261/Pressacademia.2022.1540

Abstract

Purpose- The study aims to trace out the factors contributing to earnings management practices in the commercial banks of Bangladesh.
Methodology- The study used secondary data sources from the published audited annual reports of 32(Thirty-Two) commercial banks of
Bangladesh from the year 2005-2018 of 425 observations. The study conducted preliminary diagnoses like normality, unit root, and Granger
causality test to identify the data's nature and response. Moreover, the study performed the heteroscedasticity test, autocorrelation test,
and fixed and random effect of the model to confirm the output's accuracy. Based on the above statistical diagnosis, the study has selected
Robust Least Square (RLS) regression model to show the practice of discretionary choices in the banking sector of Bangladesh. Following
Kanagaretnam et al.’s (2003), this study also derived discretionary and non-discretionary accruals from loan loss provisions.
Findings- This study considered several factors like bank size (SIZEit), loan to deposit ratio (L/DEPit), non-performing loan to previous year’s
total loan ratio (NPLRit-1), changes in non-performing loan to current total loan ratio (∆NPL/TLit), and changes in total asset to total loan ratio
(∆TA/TLit) to show the effects on banks’ earnings management. It is found that SIZEit, NPLRit-1, ∆NPL/TLit and ∆TA/TLit have a positive and
significant (p<0.01; p<0.05) effect on Bank‘s discretionary choice. However, L/DEPit positively affects earnings management but is statistically
insignificant.
Conclusion- Despite being a legal tool, earnings management is often involved with the controversy of being an unethical practice. However,
there has been a lot of research on tracing earnings management in corporate firms based on discretionary and non-discretionary accruals.
The study contributes to the existing literature and tries to explain the role of discretionary accruals in banks performance mostly in the
submerged economy. Along with identifying significant variables, the study has tried to explain the implication of these findings suggesting
some crucial steps that may help reduce the practice of earnings management as earnings management distorts the banks' financial position
or any firm and misleads the investors.

References

  • Abaoub, E., Homrani, K., & Gamra, S. B. (2013). The determinants of earnings management: empirical evidence in the Tunisian banking industry (1999-2010). Journal of Business Studies Quarterly, 4(3), 62.
  • Adams, R. B., Hermalin, B. E., & Weisbach, M. S. (2010). The role of boards of directors in corporate governance: A conceptual framework and survey. Journal of economic literature, 48(1), 58-107.
  • Beatty, A., Chamberlain, S. L., & Magliolo, J. (1995). Managing financial reports of commercial banks: The influence of taxes, regulatory capital, and earnings. Journal of accounting research, 33(2), 231-261. doi:10.2307/2491487
  • Beaver, W. H., & Engel, E. E. (1996). Discretionary behavior with respect to allowances for loan losses and the behavior of security prices. Journal of accounting and economics, 22(1-3), 177-206. doi:10.1016/S0165-4101(96)00428-4
  • Bortoluzzo, A. B., Sheng, H. H., & Gomes, A. L. P. (2016). Earning management in Brazilian financial institutions. Revista de Administração, 51(2), 182-197.
  • DeAngelo, L. E. (1986). Accounting numbers as market valuation substitutes: A study of management buyouts of public stockholders. Accounting review, 400-420.
  • Dechow, P. M. (1994). Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of accounting and economics, 18(1), 3-42. doi:10.1016/0165-4101(94)90016-7
  • Dechow, P. M., & Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77(s-1), 35-59.
  • Dechow, P. M., & Skinner, D. J. (2000). Earnings management: Reconciling the views of accounting academics, practitioners, and regulators. Accounting horizons, 14(2), 235-250.
  • Dilawer, T. (2012). Earning management and dividend policy: evidence from Pakistani textile industry. International Journal of Academic Research in Business and Social Sciences, 2(10), 362.
  • Dong, X., Liu, J., & Hu, B. (2012). Research on the relationship of commercial bank’s loan loss provision and earning management and capital management. Journal of Service Science and Management, 5(02), 171.
  • Dowla, A., & Barua, D. (2006). The poor always pay back: The Grameen II story: Kumarian Press.
  • Healy, P. M. (1985). The effect of bonus schemes on accounting decisions. Journal of accounting and economics, 7(1-3), 85-107. doi:10.1016/0165-4101(85)90029-1
  • Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting horizons, 13(4), 365-383. doi:10.2308/acch.1999.13.4.365
  • Jeter, D. C., & Shivakumar, L. (1999). Cross-sectional estimation of abnormal accruals using quarterly and annual data: Effectiveness in detecting event-specific earnings management. Accounting and Business Research, 29(4), 299-319. doi:10.1080/00014788.1999.9729590
  • Jones, J. J., (1991). Earnings management during import relief investigations. Journal of accounting research, 29(2), 193-228. doi:10.2307/2491047
  • Kanagaretnam, K., Lim, C. Y., & Lobo, G. J. (2010). Auditor reputation and earnings management: International evidence from the banking industry. Journal of Banking & Finance, 34(10), 2318-2327. doi:10.1016/j.jbankfin.2010.02.020
  • Kanagaretnam, K., Lobo, G. J., & Mathieu, R. (2003). Managerial incentives for income smoothing through bank loan loss provisions. Review of Quantitative Finance and Accounting, 20(1), 63-80. doi:10.1023/A:1022187622780
  • Kaplan, R. S. (1986). The role for empirical research in management accounting. Accounting, organizations and society, 11(4-5), 429-452. doi:10.1016/0361-3682(86)90012-7
  • Kasznik, R. (1999). On the association between voluntary disclosure and earnings management. Journal of accounting research, 37(1), 57-81. doi:10.2307/2491396
  • Kim, M.-S., & Kross, W. (1998). The impact of the 1989 change in bank capital standards on loan loss provisions and loan write-offs. Journal of accounting and economics, 25(1), 69-99. doi:10.1016/S0165-4101(98)00015-9
  • Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of accounting and economics, 39(1), 163-197. doi:0.1016/j.jacceco.2004.11.002
  • Leuz, C., Nanda, D., & Wysocki, P. D. (2003). Earnings management and investor protection: an international comparison. Journal of financial economics, 69(3), 505-527. doi:10.1016/S0304-405X(03)00121-1
  • McNichols, M., & Wilson, G. P. (1988). Evidence of earnings management from the provision for bad debts. Journal of accounting research, 1-31. doi:10.2307/2491176
  • Meisel, S. I. (2007). Detecting earnings management in bank merger targets using the modified jones model. Journal of Accounting, Ethics & Public Policy, 7(3), 301.
  • Peasnell, K. V., Pope, P. F., & Young, S. (2000). Detecting earnings management using cross-sectional abnormal accruals models. Accounting and Business Research, 30(4), 313-326. doi:10.1080/00014788.2000.9728949
  • Ronen, J., & Yaari, V. (2007). Earnings Management: Emerging Insights in Theory, Practice, and Research (Springer Series in Accounting Scholarship).
  • Shen, C.-H., & Chih, H.-L. (2005). Investor protection, prospect theory, and earnings management: An international comparison of the banking industry. Journal of Banking & Finance, 29(10), 2675-2697. doi:10.1016/j.jbankfin.2004.10.004
  • Shuto, A. (2006). The effects of ownership on earnings management and earnings informativeness. Security Analyst Journal, 44(5), 42-46.
  • Strong, N., & Walker, M. (1987). Information and capital markets. Oxford: Basil Blackwell.
  • Validated, C. (2016). Retrieved from https://stats.stackexchange.com/questions/209754/breusch-godfrey-test-under-heteroskedasticity
  • Yasuda, Y., Okuda, S. y., & Konishi, M. (2004). The relationship between bank risk and earnings management: evidence from Japan. Review of Quantitative Finance and Accounting, 22(3), 233-248. doi:10.1023/B:REQU.0000025762.89848.41
  • Yoon, S. S., & Miller, G. A. (2002). Cash from operations and earnings management in Korea. The International Journal of Accounting, 37(4), 395-412. doi:10.1016/S0020-7063(02)00193-0
Year 2022, , 1 - 11, 30.03.2022
https://doi.org/10.17261/Pressacademia.2022.1540

Abstract

References

  • Abaoub, E., Homrani, K., & Gamra, S. B. (2013). The determinants of earnings management: empirical evidence in the Tunisian banking industry (1999-2010). Journal of Business Studies Quarterly, 4(3), 62.
  • Adams, R. B., Hermalin, B. E., & Weisbach, M. S. (2010). The role of boards of directors in corporate governance: A conceptual framework and survey. Journal of economic literature, 48(1), 58-107.
  • Beatty, A., Chamberlain, S. L., & Magliolo, J. (1995). Managing financial reports of commercial banks: The influence of taxes, regulatory capital, and earnings. Journal of accounting research, 33(2), 231-261. doi:10.2307/2491487
  • Beaver, W. H., & Engel, E. E. (1996). Discretionary behavior with respect to allowances for loan losses and the behavior of security prices. Journal of accounting and economics, 22(1-3), 177-206. doi:10.1016/S0165-4101(96)00428-4
  • Bortoluzzo, A. B., Sheng, H. H., & Gomes, A. L. P. (2016). Earning management in Brazilian financial institutions. Revista de Administração, 51(2), 182-197.
  • DeAngelo, L. E. (1986). Accounting numbers as market valuation substitutes: A study of management buyouts of public stockholders. Accounting review, 400-420.
  • Dechow, P. M. (1994). Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of accounting and economics, 18(1), 3-42. doi:10.1016/0165-4101(94)90016-7
  • Dechow, P. M., & Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77(s-1), 35-59.
  • Dechow, P. M., & Skinner, D. J. (2000). Earnings management: Reconciling the views of accounting academics, practitioners, and regulators. Accounting horizons, 14(2), 235-250.
  • Dilawer, T. (2012). Earning management and dividend policy: evidence from Pakistani textile industry. International Journal of Academic Research in Business and Social Sciences, 2(10), 362.
  • Dong, X., Liu, J., & Hu, B. (2012). Research on the relationship of commercial bank’s loan loss provision and earning management and capital management. Journal of Service Science and Management, 5(02), 171.
  • Dowla, A., & Barua, D. (2006). The poor always pay back: The Grameen II story: Kumarian Press.
  • Healy, P. M. (1985). The effect of bonus schemes on accounting decisions. Journal of accounting and economics, 7(1-3), 85-107. doi:10.1016/0165-4101(85)90029-1
  • Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting horizons, 13(4), 365-383. doi:10.2308/acch.1999.13.4.365
  • Jeter, D. C., & Shivakumar, L. (1999). Cross-sectional estimation of abnormal accruals using quarterly and annual data: Effectiveness in detecting event-specific earnings management. Accounting and Business Research, 29(4), 299-319. doi:10.1080/00014788.1999.9729590
  • Jones, J. J., (1991). Earnings management during import relief investigations. Journal of accounting research, 29(2), 193-228. doi:10.2307/2491047
  • Kanagaretnam, K., Lim, C. Y., & Lobo, G. J. (2010). Auditor reputation and earnings management: International evidence from the banking industry. Journal of Banking & Finance, 34(10), 2318-2327. doi:10.1016/j.jbankfin.2010.02.020
  • Kanagaretnam, K., Lobo, G. J., & Mathieu, R. (2003). Managerial incentives for income smoothing through bank loan loss provisions. Review of Quantitative Finance and Accounting, 20(1), 63-80. doi:10.1023/A:1022187622780
  • Kaplan, R. S. (1986). The role for empirical research in management accounting. Accounting, organizations and society, 11(4-5), 429-452. doi:10.1016/0361-3682(86)90012-7
  • Kasznik, R. (1999). On the association between voluntary disclosure and earnings management. Journal of accounting research, 37(1), 57-81. doi:10.2307/2491396
  • Kim, M.-S., & Kross, W. (1998). The impact of the 1989 change in bank capital standards on loan loss provisions and loan write-offs. Journal of accounting and economics, 25(1), 69-99. doi:10.1016/S0165-4101(98)00015-9
  • Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of accounting and economics, 39(1), 163-197. doi:0.1016/j.jacceco.2004.11.002
  • Leuz, C., Nanda, D., & Wysocki, P. D. (2003). Earnings management and investor protection: an international comparison. Journal of financial economics, 69(3), 505-527. doi:10.1016/S0304-405X(03)00121-1
  • McNichols, M., & Wilson, G. P. (1988). Evidence of earnings management from the provision for bad debts. Journal of accounting research, 1-31. doi:10.2307/2491176
  • Meisel, S. I. (2007). Detecting earnings management in bank merger targets using the modified jones model. Journal of Accounting, Ethics & Public Policy, 7(3), 301.
  • Peasnell, K. V., Pope, P. F., & Young, S. (2000). Detecting earnings management using cross-sectional abnormal accruals models. Accounting and Business Research, 30(4), 313-326. doi:10.1080/00014788.2000.9728949
  • Ronen, J., & Yaari, V. (2007). Earnings Management: Emerging Insights in Theory, Practice, and Research (Springer Series in Accounting Scholarship).
  • Shen, C.-H., & Chih, H.-L. (2005). Investor protection, prospect theory, and earnings management: An international comparison of the banking industry. Journal of Banking & Finance, 29(10), 2675-2697. doi:10.1016/j.jbankfin.2004.10.004
  • Shuto, A. (2006). The effects of ownership on earnings management and earnings informativeness. Security Analyst Journal, 44(5), 42-46.
  • Strong, N., & Walker, M. (1987). Information and capital markets. Oxford: Basil Blackwell.
  • Validated, C. (2016). Retrieved from https://stats.stackexchange.com/questions/209754/breusch-godfrey-test-under-heteroskedasticity
  • Yasuda, Y., Okuda, S. y., & Konishi, M. (2004). The relationship between bank risk and earnings management: evidence from Japan. Review of Quantitative Finance and Accounting, 22(3), 233-248. doi:10.1023/B:REQU.0000025762.89848.41
  • Yoon, S. S., & Miller, G. A. (2002). Cash from operations and earnings management in Korea. The International Journal of Accounting, 37(4), 395-412. doi:10.1016/S0020-7063(02)00193-0
There are 33 citations in total.

Details

Primary Language English
Subjects Finance, Business Administration
Journal Section Articles
Authors

Niluthpaul Sarker This is me 0000-0002-9911-0706

Anupam Das Gupta This is me 0000-0002-0094-4541

Publication Date March 30, 2022
Published in Issue Year 2022

Cite

APA Sarker, N., & Gupta, A. D. (2022). DISCRETIONARY CHOICES OF COMMERCIAL BANKS IN BANGLADESH: AN EARNINGS MANAGEMENT APPROACH. Journal of Economics Finance and Accounting, 9(1), 1-11. https://doi.org/10.17261/Pressacademia.2022.1540

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