Research on the Relationship of Commercial Bank’s Loan Loss Provision and Earning Management and Capital Management

Abstract

This paper reviewed and analyzed the development of our nation's loan loss provision system, then studied the relations of commercial bank loan loss provision and earnings management and capital management through empirical study. This paper selected 14 domestic commercial banks of year 2001-2009 as data sample, using Kanagaretnam et al.'s (2003) research method, dividing the loan loss provision into two parts that is discretionary and nondiscretionary part, and empirically studied the relationship of discretionary part of loan loss provision and earnings before taxes and provisions (EBTP) and capital adequacy ratio (CAR). Empirical results show that: there is significant positive correlation between the discretionary loan loss provisions and earnings before taxes and provisions (EBTP), and there is significant negative correlation between the discretionary loan loss provisions and capital adequacy ratio (CAR). That provides evidence for the relation of bank loan loss provision and earnings management and capital management. In the last, combining with empirical research findings and the status of the loan loss provision system of China's commercial banks, this paper made several suggestions to improve the system of loan loss provision.

Loan Loss Provisions, Income Smooth, Signaling, Capital Management and Pro-Cyclicality. Empirical Evidence from Mozambique’s Commercial Banks

“…As can be observed the coefficient λ 9 , on Cap i,t variable is insignificantly negative implying that capital management does not have any impact on LLP, consequently suggesting a rejection of capital management hypothesis for Mozambican commercials banks. This result is similar to Adzis et al, 2015;Caporale et al, 2015 studies and opposes the findings of Ahmed et al, 1999 andDong et al, 2012 studies.…”

“…In order to support capital management hypotheses we highlight some studies, for example Dong et al (2012) using a sample of 14 China commercial banks during period 2001-2009 found evidence to lend to support the capital management hypothesis in China banks. The finding shows that when the bank capital adequacy is low, the managers set aside more LLP to increase bank capital in order to satisfy the regulatory requirements.…”

“…Following prior study (Dong et al, 2012;Bouvatier et al, 2014;Skala, 2015;Adzis et al, 2015;Caporale et al, 2015;Ozili, 2015), we include the ratio of non-performing loans to total loans (NPL i,t ) as an indicator of loan default, the loan loss provision will be higher if we have the higher non-performing loan. It's expected to have a positive relationship between NPL and LLP.…”

“…LLP i,t-1 = The ratio of beginning loan loss provision to the total asset for bank i and time t, (Dong et al, 2012;Bouvatier et al, 2014 andCaporale et al, 2015).…”

“…The recent baking literature is Dong et al (2012); Leventies et al (2012); Curcio and Hasan (2013); Bouvatier at al. (2014); Ozili (2015); Adziz et al (2015); Fernando and Ekanayaka (2015) and Caporale et al (2015).…”