A comparative study on Earnings Management in Commercial Banks in China, the UK and the US

Abstract

The research investigates how earnings management objectives vary between countries. Unbalanced panel data from 127 Chinese commercial banks, 39 UK commercial banks and 3,127 US commercial banks, consisting of 447 bank-year observations from 2013-2018 in China, 150 bank-year observations from 2013- 2018 data in the UK and 10,522 bank-year observations from 2014-2018 in the US, are used in this research. This research uses the loan loss provisions as the main earnings management approach in commercial banks. According to the research results, among the three most relevant earnings management objectives, including capital management, income smoothing and signalling, in the banking industry, capital management is the most critical factor in the US, and income smoothing is most prevalent in China. Furthermore, UK and US banks overestimate loan loss provisions to signal positive future pre-managed earnings changes. However, commercial banks in China manage reported earnings downward via overestimated loan loss provisions to signal negative future pre- managed earnings changes. Further research shows that conservatism constrains Chinese commercial banks' capital management and income smoothing behaviours via loan loss provisions. However, conservatism encourages capital management and income smoothing behaviours via loan loss provisions in the US and has no moderating effects in the UK. Conservatism also facilitates Chinese commercial banks to signal positive future pre-managed earnings changes by managing reported earnings upward via underestimated loan loss provisions. The level of risk is not significantly related to capital management and income smoothing behaviours in any of these three countries. However, riskier banks are more likely to signal positive future pre-managed earnings changes via overestimated loan loss provisions in the US. The research developed a new model to compare the extent of different earnings management objectives between countries. In addition, it enriches the literature about earnings management in commercial banks by examining how the bank-level measure of conservatism and risk influence the impact of various earnings management objectives on loan loss provisions. Finally, research findings provide implications for accounting standard setters and bank regulators and supervisors: promoting accounting quality such as conservatism could play a different role in various institutional contexts; monitoring the level of insolvency risk may not necessarily improve financial report quality in the banking industry.

Date of Award	2 Aug 2022
Original language	English
Awarding Institution	University of Roehampton
Supervisor	Elaine Harris (Director of Studies), Premkanth Puwanenthiren (Co-Supervisor) & Irma Malafronte (Co-Supervisor)