Activity strategies, information asymmetry, and bank opacity

Abstract

Using a large panel of US bank holding companies from 2001 to 2015, we investigate the association between functional diversification and bank earnings management. We document a positive relationship between bank earnings management and bank diversification. Our findings are consistent with the hypothesis that diversification increases the asymmetric information of banks, leading to greater discretionary power by bank managers. This effect is most prevalent in smaller banks and non-dividend paying banks. The impact of diversification on earnings management is less pronounced during the crisis. Our study is of interest to regulators and other stakeholders who examine factors which affect behavior of bank managers. About the Authors: Viet-DungTran is affiliated with the Center for Studies and Applied Research in Management (CERAG) and Université Grenoble Alpes. He pursues research on the capital structure of Vietnamese banks. M.

Funding liquidity and bank lending

“…Second, we provide the evidence of the effects of funding liquidity over the entire range of the lending distribution. The traditional inference technique reflects specifications reflect the conditional average association between bank lending and bank funding liquidity with the assumption of the homogeneity of the effects of funding liquidity to bank lending Tran et al (2019a). Our quantile regressions document that funding liquidity not only affects the conditional average of lending but also influences the dispersion of lending.…”

“…All bank-quarter observations with missing or incomplete financial data on accounting variables are removed. Following Berger & Christa (2013); Tran & Ashraf (2018); Tran, Hassan, & Houston (2019b); Tran et al (2019a), all observations with the capital ratio less than 1% are replaced by 1% to avoid distortion in ratios that contain equity. We also exclude observations with negative or nonexistent outstanding loans or deposits.…”

Activity Strategies, Agency Problems, and Bank Risk

“…The previous investigation uses the traditional inference approach to describe the average behavior of the sample with the assumption of homogeneity of diversification effects on bank risk (Tran, Hassan, and Houston 2019a, 2019b). However, when heterogeneity in the sample is important, using a traditional inference approach might not be ideal.…”

“…Second, we provide evidence of the effects of diversification over the entire range of the risk distribution. Rather than relying on a single description of the central behavior of the sample, our quantile approach explores a range of conditional quantile functions, which in turn allows us to explore potential forms of conditional heterogeneity (Tran, Hassan, and Houston 2019a, 2019b). Examining bank risk at the extreme distribution is also of interest of regulators and investors.…”

Discretionary Loan Loss Provision Behaviour and Banks’ Liquidity Creation

“…As mentioned above, the versatility and intent to use discretionary feature of the LLP by banks have been explored by many researchers. There are studies that looked at the behavioural pattern of usage of the provision during the crisis eras and normal business cycle (Laeven & Majnoni, 2003;El Sood, 2012;Agénor & Zilberman, 2015); relationship between pro-cyclical use of the LLP and uncertainty of the financial system as well as the systemic risk (Borio, Furfine, & Lowe, 2001;Wong, Fong, & Choi 2011); accommodating use of LLP and pro-cyclicality (Saurina, 2009;Perez, Salas-Fumas, & Saurina, 2008); the role that LLP plays in managing earnings, regulatory capital, signaling and tax (Lobo & Yang, 2001;Kanagaretnam, Lobo, & Yang, 2005;Anandarajan, Hasan, & McCarthy, 2007;Perez, Salas-Fumas, & Saurina, 2008;Peterson, 2015;2017a;2017b;Andries, Gallemore, & Jacob, 2017;Tran, Hassan, & Houston, 2018); LLP allowance discretion by bank managers under various accounting and regulatory country setups (Leventis, Dimitropoulos, & Anandarajan, 2011;Kilic, Lobo, Ranasinghe, & Sivaramakrishnan, 2012;Alali & Jaggi, 2011;Wezel, Chan Lau, & Columba, 2012;Ryan & Keeley, 2013;Hamadi, 2016;Marton & Runesson, 2017); LLP and bank operations (Tran & Ashraf, 2018;Tran, Hassan, & Houston, 2019); LLP and credit competition (Dou, Ryan, & Zou, 2016); relationship between LLP and characteristics of auditor (Kanagaretnam, Lim, & Lobo, 2010;Dahl, 2013); relationship between corporate governance, institutional control and discretionary LLP (Fonseca & Gonzàlez, 2008;…”