International accounting differences and earnings smoothing in the banking industry

Abstract

This study provides empirical evidence on the propensity of bank managers to smooth earnings through loan-loss provisions. The analysis on a sample of international banks using both pooled time-series cross-sectional and panel-data regressions leads to three main conclusions. First, bank managers actively use loan-loss provisions either to smooth high earnings or as an income-reducing tool when earnings are abnormally low. This result is consistent with Healey�s (1985) compensation theory. Second, all other things being equal, banks following IFRSs or non-US local GAAPs have a greater discretion to smooth earnings. US GAAP exhibit the highest accounting quality, as remarked in Barth, Landsman, Lang and Williams (2006). Finally, we observe that in 2008, when the financial crisis hit its most critical stage, banks seemed to reduce the extent of earnings smoothing because they could have been below the minimum threshold for carrying out smoothing practices.