The influence of earnings management and bank structure on bank performance

Abstract

Purpose The purpose of this paper is to examine the influence of bank structure and earnings management on bank performance in international markets. Specifically, the authors empirically examine non-foreign banks in the following emerging countries: Brazil, China, India, Mexico, Nigeria, Russia, and South Africa. Design/methodology/approach A review of loan loss portfolio and bank’s power structure is examined to formulate testable conjectures. The authors used data collected from Bankscope for the aforementioned countries. The data range is from 1997 to 2009. Findings The results suggest that: first, bank market structure and earnings management have a significantly negative influence on bank performance. Second, the negative influence is more pronounced in banks with higher level of concentration and earnings management. Practical implications The evidence suggest that banks with monopoly power have a greater incentive to establish lending relationships, and monopoly enhancing regulation in the financial sector at the time of the Civil War contributed to industrialization in the USA. The evidence in the emerging market suggest that monopoly power (bank structure) and propensity to manage earnings leads to lower bank performance. As such, helping bankers in understanding the effect of their bank structure in relation to their performance. Originality/value To the author’s knowledge, this is the first study that explores the determinants of managed earnings and bank structure on bank performance in emerging markets.

Earnings Management for Bonus Compensation

“…Earnings management is an effort by management to intervene in preparing financial statements to achieve certain goals. Researchers measure the level of earnings management of Loan Loss Provisions (LLP) using the Kanagaretnam's Model, et al (2003) while the Loan Loss Allowance (LLA) by using the Hasan and Wall's ( 2004) model modified by Ujah (2017). Bonus is an independent variable in this study which will be measured using a dummy variable, where companies that distribute bonuses will be given a score of 1 and companies that do not distribute bonuses will be given a score of 0 (Pujiati and Muhammad, 2013).…”

The CSR Performance and Earning Management Practice on the Market Value of Conventional Banks in Indonesia

“…Earnings management in the banking sector is achieved through the reduction of discretionary accruals from the total accrual. For this sector, earnings management is often reflected by Loan Loss Provision (LLP) (Othman & Mersni, 2014;Ujah et al, 2017). Banks use LLP to manage their earnings.…”

“…A high activity level of earnings management can mislead financial statement users. The low quality of information generated from the adverse selection can affect a company's market value investor (Ujah et al, 2017). A company with a high level of integrity and credibility will acquire the public's trust (Mukherjee & Nuñez, 2019), and so raises its market value.…”

Quality of Reported Earnings: An Empirical Study of Indian Banking Industry

“…Business Standard has reported that Yes bank which is at the verge of bankruptcy has bad loans that are four times what Yes Bank had reported in its audited financial statements (Mukherjee, 2019, p. 4). EM results in poor financial performance of banks in long run Vision 25(2) (Alhadab & Al-Own, 2017;Ashfaq & Saeed, 2017;Ujah et al, 2017;Umoren et al, 2018;Wu et al, 2016). Thus, it becomes inevitable to detect EM at early stages.…”