Loan loss provisions, earnings management and capital management under IFRS:the case of EU commercial banks


Prior research has shown that loan loss provisions are primarily used as a tool for earnings management and capital management by listed banks. Effective 2005 all listed companies in the European Union (EU) are required to comply with International Financial Reporting Standards (IFRS). Adherence to IFRS, it is claimed, should enhance transparency of reporting practices relative to local General Accepted Accounting Principles (GAAP). The overall objective of this paper is to examine the impact of the implementation of IFRS on the use of loan loss provisions (LLPs) to manage earnings and capital. We use a sample of 91 EU listed commercial banks covering a period of 10 years (before and after implementation of IFRS). Since early adopters may have different incentives and motivations relative to those who adopt mandatorily, we dichotomize our sample into early and late adopters. Overall, we find that earnings management (using loan loss provisions) for both early and late adopters while significant over the estimation window is significantly reduced after implementation of IFRS. We also find that, for risky banks, earnings management behavior is more pronounced when compared to the less risky banks, but is significantly reduced in the post IFRS period. Capital management behavior by bank managers is not significant in both pre and post IFRS regimes. Overall, we conclude that the implementation of IFRS in the EU appears to have improved earnings quality by mitigating the tendency of bank managers of listed commercial banks to engage in earnings management using loan loss provisions.

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Divisions: College of Business and Social Sciences > Aston Business School > Accounting
College of Business and Social Sciences > Aston Business School
Additional Information: The final publication is available at
Uncontrolled Keywords: earnings management,capital management,loan loss provisions,IFRS ,European Union
Publication ISSN: 1573-0735
Full Text Link: http://link.spr ... 0693-010-0096-1
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PURE Output Type: Article
Published Date: 2011-10
Authors: Leventis, Stergios
Dimitropoulos, Panagiotis E.
Anandarajan, Asokan



Version: Accepted Version

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