Regulation, Supervision and Accounting ConservatismThe Interaction of the Three Pillars of Basel II on the Quality of Reported Earnings in Worldwide Banks

  1. Inmaculada Díaz Sánchez 1
  2. Isabel Martinez-Conesa 1
  3. Manuel Illueca-Muñoz 2
  1. 1 Universidad de Murcia, Murcia-SPAIN
  2. 2 Universidad Jaume I, Castelló de la Plana-SPAIN.
Revista:
Revista de contabilidad = Spanish accounting review: [RC-SAR]

ISSN: 1138-4891

Año de publicación: 2023

Volumen: 26

Número: 2

Páginas: 330-342

Tipo: Artículo

DOI: 10.6018/RCSAR.438811 DIALNET GOOGLE SCHOLAR lock_openDIGITUM editor

Otras publicaciones en: Revista de contabilidad = Spanish accounting review: [RC-SAR]

Resumen

Accounting conservatism is a quality of earnings positively associated with the strength of banking regulation and supervision and also high market discipline, but there still remains the unresolved question of the way these three pillars of Basel II interact with each other. We analyse how regulatory and supervisory regimes in the banking industry clearly interact with market discipline measures, such as listing status, ownership, market concentration and disclosure requirements between ten years before Basel II fails, drawing upon data from 14,651 bank year observations from 54 different countries. According to our findings, there is a clear correlation between the strength of the enforcement of regulation and supervision and accounting conservatism success in countries where market discipline fails. That is to say, the supervisory power reinforces the effect of listing status, ownership and concentration on conservatism whereas the capital regulatory system mitigates the effect of market discipline on conservatism. We also evidence that in a powerful regulatory system, more disclosure requirements are associated in less conservatism policies in financial entities. Strong increases in regulation, its enforcement and supervisory power introduced in the Basel III mechanism is subject to the debate posed in this paper. The quality of accounting earnings can be improved to prevent bank failures through the application of strong Pillars I and II, i.e., regulation and supervision. Having said that, market discipline still remains a key factor in achieving financial stability.

Referencias bibliográficas

  • Alali, F., & Jaggi, B. (2010). Earnings versus capital ratios management: role of bank types and SFAS 114. Review of Quantitative Finance Accounting, 36(1), 105-132. https://doi.org/10.1007/s11156-010-0173-4
  • Ahmed, A.S., & Duellman, S. (2007). Accounting characteristics and Board of Directors characteristics: An empirical analysis. Journal of Accounting and Economics, 43, 411-437. https://doi.org/10.1016/j.jacceco.2007.01.005
  • Ball, R., & Shivakumar, L. (2005). Earnings quality in UK private firms: Comparative loss recognition timeliness. Journal of Accounting and Economics, 39(1), 83-128. https://doi.org/10.1016/j.jacceco.2004.04.001
  • Barth, J.R., Caprio, G., & Levine, R. (2001). The regulation and supervision of banks around the world: A new database. World Bank Working Paper No. 2588. The updated version is available from http://econ.worldbank.org
  • Barth, J.R., Caprio, G., & Levine, R. (2004). Bank regulation and supervision: What works best? Journal of Financial Intermediation, 13(2), 205-248. https://doi.org/10.1016/j.jfi.2003.06.002
  • Barth, J. R., Caprio, G., & Levine, R. (2006). Rethinking bank regulation. Till angels govern. Cambridge, UK: Cambridge University Press.
  • Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24(1), 3-37. https://doi.org/10.1016/S0165-4101(97)00014-1
  • Beatty, A.L., & Harris, D.H. (1999). The effects of taxes, agency cost and information asymmetry on earnings management: A comparison of public and private firms. Review of Accounting Studies, 4, 299-326. https://doi.org/10.1023/A:1009642403312
  • Beatty, A. L., Ke, B., & Petroni, K. R. (2002). Earnings Management to Avoid Earnings Declines across Publicly and Privately Held Banks. The Accounting Review, 77(3), 547-570. http://www.jstor.org/stable/3068887
  • Beatty, A., & Liao, S. (2011). Do delays in expected loss recognition affect banks' willingness to lend? Journal of Accounting and Economics, 52(1), 1-20. https://doi.org/10.1016/j.jacceco.2011.02.002
  • Beck, T., Demirguc-Kunt, A.M., & Maksimovic, V. (2004). Bank Competition and Access to Finance: International Evidence. Journal of Money, Credit, and Banking, 36, 627-648.
  • Berger, A. N., Clarke, G. R.G., Cull, R., Klapper, L., & Udell, G. F. (2005). Corporate governance and bank performance: A joint analysis of the static, selection, and dynamic effects of domestic, foreign, and state ownership. Journal of Banking & Finance, 29(8-9), 2179-2221, https://doi.org/10.1016/j.jbankfin.2005.03.013
  • Berger, A.N., Hasan, I., & Klapper, L.F. (2004). Further Evidence on the Link between Finance and Growth: An International Analysis of Community Banking and Economic Performance. Journal of Financial Services Research, 25, 169-202. https://doi.org/10.1023/B:FINA.0000020659.33510.b7
  • Bertrand, M., Schoar, A., & Thesmar, D. (2007). Banking deregulation and industry structure: Evidence from the French Banking Reforms of 1985. Journal of Finance, 62(2), 597-628. https://doi.org/10.1111/j.1540-6261.2007.01218.x
  • Bhat, V. N. (1996). Banks and income smoothing: an empirical analysis. Applied Financial Economics, 6(6), 505-510. https://doi.org/10.1080/096031096333953
  • Bikker, J.A., & Metzemakers, P.A.J. (2005). Bank provisioning behaviour and procyclicality. Journal of International Financial Markets, Institutions and Money, 15(2), 141-157. https://doi.org/10.1016/j.intfin.2004.03.004
  • Biurrun, V., & Rudolf, M. (2010). Mitigating Bank Earnings Management: The Role of Regulation and Supervision. Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1600703
  • Bonito, A., & Pais, C. (2018). The macroeconomic determinants of the adoption of IFRS for SMEs. Revista de Contabilidad-Spanish Accounting Review, 21(2), 116-127. https://doi.org/10.1016/j.rcsar.2018.03.001
  • Bouvatier, V., Lepetit, L., & Strobel, F. (2014). Bank income smoothing, ownership concentration and the regulatory environment. Journal of Banking and Finance, 41(1), 253-270. https://doi.org/10.1016/j.jbankfin.2013.12.001
  • Bushman, R., & Williams, C. (2012). Accounting discretion, loan loss provisioning, and discipline of Banks' risk-taking. Journal of Accounting and Economics, 54(1), 1-18. https://doi.org/10.1016/j.jacceco.2012.04.002
  • Cabedo, J.D., & Tirado, J.M. (2016). Cantidad y calidad de información de riesgos divulgada por las empresas españolas: Un análisis en periodos diferentes del ciclo económico. Revista de Contabilidad-Spanish Accounting Review, 19 (2), 261-270. https://doi.org/10.1016/j.rcsar.2016.05.001
  • Carbó, S., Humphrey, D., & Rodríguez, F. (2003). Bank deregulation is better than bank mergers. Journal of International Financial Institutions, Markets, and Money, 13(5), 429-449. https://doi.org/10.1016/S1042-4431(03)00017-9
  • Cetorelli, N., & Gambera, M. (2001). Banking market structure, financial dependence and growth: International evidence from industry data. Journal of Finance, 56(2), 617-648. https://doi.org/10.1111/0022-1082.00339
  • Cetorelli, N., & Strahan, P. (2006). Finance as a barrier to entry: Bank competition and industry structure in local U.S. markets. Journal of Finance, 61(1), 437-461. https://doi.org/10.1111/j.1540-6261.2006.00841.x
  • Chhaochharia, V., Grullon, G., Grinstein, Y., & Michaely, R. (2012). Product market competition and agency conflicts: Evidence from the Sarbanes Oxley law. Johnson School Research Paper Series, (18-2012).
  • Clair, R.T. (1992). Loan growth and loan quality: Some preliminary evidence from Texas Banks. Economic Review, Federal Reserve Bank of Dallas, Third Quarter, 9-21.
  • Clarke, G., & Cull, R. (2002). Political and economic determinants of the likelihood of privatizing Argentine public banks. Journal of Law and Economics, 45(1), 165-97. https://doi.org/10.1086/324653
  • Curcio, D., De Simone, A., & Gallo, A. (2017). Financial crisis and international supervision: New evidence on the discretionary use of loan loss provisions at Euro Area commercial Banks. The Bristish Accounting Review, 49(2), 181-193. https://doi.org/10.1016/j.bar.2016.09.001
  • Curcio, D., & Hassan, I. (2015). Earnings and capital management and signaling: the use of loan-loss provisions by European banks. European Journal of Finance, 21(1), 26-50. https://doi.org/10.1080/1351847X.2012.762408
  • Domikowsky, C., Duellmann, K., Bornemann, S., Pfingsten, A. (2014). Loan loss provisioning and procyclicality: evidence from an expected loss model. Discussion paper nº 39/2014. Deutsche Bundesbank.
  • Dinç, I. S. (2005). Politicians and banks: Political influences on government-owned banks in emerging markets. Journal of Financial Economics, 77(2), 453-479. https://doi.org/10.1016/j.jfineco.2004.06.011
  • El-Bannany, M. (2017). Factors influencing accounting conservatism in banks: the UAE case. Journal of Governance and Regulation, 6(2), 14-21. https://doi.org/10.22495/jgr_v6_i2_p2
  • El Sood, H.A. (2012). Loan loss provisioning and income smoothing in US banks pre and post the financial crisis. International Review of Financial Analysis, 25, 64-72. https://doi.org/10.1016/j.irfa.2012.06.007
  • Fonseca, A., & González, F. (2008). Cross-country determinants of bank income smoothing by managing loan-loss provisions. Journal of Banking and Finance, 32(2), 217-228. https://doi.org/10.1016/j.jbankfin.2007.02.012
  • García Osma, B., Mora, A., & Porcuna-Enguix, L. (2019). Prudential supervisors' independence and income smoothing in European banks, Journal of Banking and Finance, 102, 156-176. https://doi.org/10.1016/j.jbankfin.2019.03.001
  • Giroud, X., & Mueller, H. (2010). Does corporate governance matter in competitive industries? Journal of Financial Economics, 95(3), 312-331. https://doi.org/10.1016/j.jfineco.2009.10.008
  • Givoly, D., Hayn, C., & Katz, S. (2010). Does Public Ownership of Equity Improve Earnings Quality? The Accounting Review, 85(1), 195-225. https://doi.org/10.2308/accr.2010.85.1.195
  • Ha, J., (2020). Bank Accounting Conservatism and Bank Loan Quality. Journal of Business, Finance & Accounting, 48 (2).
  • Ha, J. (2021). Bank accounting conservatism and bank loan quality, Journal of Business, Finance and Accounting, 48(3-4), 498-532. https://doi.org/10.1111/jbfa.12484
  • Hau, H., & Thum, M. (2009). Subprime Crisis and Board (in-) Competence: Private versus Public Banks in Germany. Economic Policy, 24(60), 701-752. http://www.jstor.org/stable/40272535
  • Hou, K., & Robinson, D. (2006). Industry Concentration and Average Stock Returns. The Journal of Finance, 61(4), 1927-1956. https://doi.org/10.1111/j.1540-6261.2006.00893.x
  • Holmstrom, B. (1982). Moral Hazard in Teams. The Bell Journal of Economics, 13(2), 324-340. https://doi.org/10.2307/3003457
  • Huang, W. (2021). Does banking deregulation affect accounting conservatism? Journal of Accounting and Public Policy, 40(6), 106876. https://doi.org/10.1016/j.jaccpubpol.2021.106876
  • International Accounting Standard Board (2014): 2014 International Financial Reporting Standards IFRS: Official Pronouncements Issued at 1 January 2014. London, UK: IFRS Foundation.
  • Illueca, M., Norden, L., & Udell, G. F. (2011). Liberalization, Bank Governance, and Risk Taking. EFA 2008 Athens Meetings Paper, AEA 2012 Chicago Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1785793 or https://doi.org/10.2139/ssrn.1785793
  • Illueca, M., Norden, L., & Udell, G., (2012). Do Changes in the Timeliness of Loan Loss Recognition Affect Bank Risk Taking? Available at: http://www.b.kobe-u.ac.jp/phd/files/sesami_20130329ud.pdf
  • Illueca, M., Norden, L., Pacelli, J., & Udell, G. F. (2020). Countercyclical Prudential Buffers and Bank Risk-taking. Available at SSRN: https://ssrn.com/abstract=2022644 or https://doi.org/10.2139/ssrn.2022644
  • Jensen M., & Meckling, W. (1976). Theory of the firm: managerial behavior agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
  • Khan, M., & Watts, R. (2009). Estimation and empirical properties of a firm-year measure of accounting conservatism. Journal of Accounting and Economics, 48(2-3), 132-150. https://doi.org/10.1016/j.jacceco.2009.08.002
  • La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2002). Government Ownership of Banks. The Journal of Finance, 57(1), 265-301. http://www.jstor.org/stable/2697840
  • La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2006). What Works in Securities Laws? The Journal of Finance, 61(1), 1-32. https://doi.org/10.1111/j.1540-6261.2006.00828.x
  • Laeven, L., & Levine, R. (2009): Bank Governance, Regulation and Risk Taking. Journal of Financial Economics, 93 (2), 259-275.
  • Laeven, L., & Majnoni, G. (2003). Loan Loss Provisioning and economic slowdowns: too much, too late? Journal of Financial Intermediation, 12, 178-197. https://doi.org/10.1016/S1042-9573(03)00016-0
  • Leventis, S., Dimitropoulos, P., & Owusu-Ansah, S. (2013). Corporate Governance and Accounting Conservatism: Evidence from the Banking Industry. Corporate Governance: An International Review, 21(3), 264-286. https://doi.org/10.1111/corg.12015
  • Levine, R. (2002). Bank-based or market-based financial systems: Which is better? Working paper 9138. Available at http://www.nber.org/papers/w9138
  • Moyer, S. (1990). Capital adequacy ratio regulations and accounting choices in commercial banks. Journal of Accounting and Economics, 13(2), 123-154. https://doi.org/10.1016/0165-4101(90)90027-2
  • Nalebuff, B. J., & Stiglitz, J. E. (1983). Prizes and Incentives: Towards a General Theory of Compensation and Competition. The Bell Journal of Economics, 14(1), 21-43. https://doi.org/10.2307/3003535
  • Nichols, D., Wahlen, J., & Wieland, M. (2009). Publicly traded versus privately held: implications for conditional conservatism in bank accounting. Review of Accounting Studies, 14, 88-122. https://doi.org/10.1007/s11142-008-9082-3
  • Pereira, A., & Gaspar, M. (2017). Earnings management ans European Regulation 1606/2002: Evidence from non-financial Portuguese companies listed in Euronext. Revista de Contabilidad-Spanish Accounting Review, 20 (2), 107-117. https://doi.org/10.1016/j.rcsar.2017.05.002
  • Petersen, M. A., & Rajan, R. G. (1995). The Effect of Credit Market Competition on Lending Relationships. The Quarterly Journal of Economics, 110(2), 407-443. https://doi.org/10.2307/2118445
  • Puri, M., Rocholl, J., & Steffe, S. (2011). Global Retail Lending in the Aftermath of the US Financial Crisis: Distinguishing between Demand and Supply Effects. Journal of Financial Economics, 100, 556-578. https://doi.org/10.1016/j.jfineco.2010.12.001
  • Salas, V., & Saurina, J. (2002). Credit risk in two institutional regimes: Spanish commercial and savings banks. Journal of Financial Services Research, 22, 203-224. https://doi.org/10.1023/A:1019781109676
  • Saurina, J. (2009). Dynamic Provisioning. The experience of Spain. Crisis Response. Public Policy for the Private Sector. Note Number 7. Washington D. C., USA: The World Bank.
  • Sapienza, P. (2004). The effects of government ownership on bank lending. Journal of Financial Economics, 72, 357-384. https://doi.org/10.1016/j.jfineco.2002.10.002
  • Suarez, O. (2015). ¿Es neutral la información sobre resultados? Revista de Contabilidad-Spanish Accounting Review, 19 (2), 204-215. https://doi.org/10.1016/j.rcsar.2015.09.001
  • Stiroh, K. J., & Strahan, P. E. (2003). Competitive Dynamics of Deregulation: Evidence from U.S. Banking. Journal of Money, Credit and Banking, 35(5), 801-828. http://www.jstor.org/stable/3649829
  • Wang, C., Xie, F., & Xin, X. (2010). Managerial Ownership of Debt and Accounting Conservatism. Available at SSRN:
  • Watts, R. (2003). Conservatism in accounting part I: Explanations and implications. Accounting Horizons, 17(3), 207-221. https://doi.org/10.2139/ssrn.414522
  • Watts, R.L., & Zimmerman, J.L. (1986). Positive Accounting Theory. New Jersey, USA: Prentice Hall.
Fuente de los datos: Dialnet