Earnings and capital management in European banks – Combining a multivariate regression with a qualitative comparative analysis

Earnings and capital management in European banks – Combining a multivariate regression with a... In this paper, we analyze the effects of the 2008 financial crisis and the ensuing sovereign debt crisis on the quality of financial reporting in European banks by investigating the existence of earnings and capital management. The sample comprises countries for which the debt crisis was more severe (Greece, Portugal, Ireland, and Italy) and two major European economies (France and Germany) for which the crisis was not as severe. The data analysis consists of a multivariate regression to examine the correlation between operating income and banks' regulatory capital via loan loss provisions. Further, we use a fuzzy-set qualitative comparative analysis (fsQCA) that indicates causal paths for the loan loss provisions. The multivariate results indicate that bank managers use loan loss provisions to manage earnings and regulatory capital during the sample period. The findings do not provide clear evidence of a decrease in managerial discretion after the 2008 financial crisis. Nevertheless, in the severely affected countries, the results indicate that the level of earnings and capital management decreases. Further, fsQCA shows that loan loss provisions exist and that a bank's size and its nonperforming loans can play key roles in their existence. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Business Research Elsevier

Earnings and capital management in European banks – Combining a multivariate regression with a qualitative comparative analysis

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Publisher
Elsevier
Copyright
Copyright © 2017 Elsevier Inc.
ISSN
0148-2963
eISSN
1873-7978
D.O.I.
10.1016/j.jbusres.2017.12.034
Publisher site
See Article on Publisher Site

Abstract

In this paper, we analyze the effects of the 2008 financial crisis and the ensuing sovereign debt crisis on the quality of financial reporting in European banks by investigating the existence of earnings and capital management. The sample comprises countries for which the debt crisis was more severe (Greece, Portugal, Ireland, and Italy) and two major European economies (France and Germany) for which the crisis was not as severe. The data analysis consists of a multivariate regression to examine the correlation between operating income and banks' regulatory capital via loan loss provisions. Further, we use a fuzzy-set qualitative comparative analysis (fsQCA) that indicates causal paths for the loan loss provisions. The multivariate results indicate that bank managers use loan loss provisions to manage earnings and regulatory capital during the sample period. The findings do not provide clear evidence of a decrease in managerial discretion after the 2008 financial crisis. Nevertheless, in the severely affected countries, the results indicate that the level of earnings and capital management decreases. Further, fsQCA shows that loan loss provisions exist and that a bank's size and its nonperforming loans can play key roles in their existence.

Journal

Journal of Business ResearchElsevier

Published: Aug 1, 2018

References

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