Abstract
The study aims at analysing whether the earnings are managed in the banking industry in India considering the provisioning standards issued by the RBI. The study also examines the presence of capital management and signalling practices by Indian Banks through the usage of Provision for Non-Performing Assets (PNPA). The study comprises of 84 banks in India which includes nationalised banks, private banks and foreign banks focusing on financial data from FY 2005–2016. The study uses panel data regression model for exploring the presence of earnings management, capital management and signalling. The dependent variable considered is PNPA and the independent variables are lag of dependent variable, return on assets, capital adequacy ratio, and change in operating profit. We have also included certain control variables viz. credit deposit ratio, total assets, closing gross NPA, GDP, real interest rates. The results of our study indicates income smoothing practices by Indian Banks. However, the results do not prove the presence of capital management or signalling practices by Indian Banks through the usage of provision for NPA.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Ahmed, A. S., Takeda, C., & Thomas, S. (1999). Bank loan-loss provisions: A re-examination of capital management, earnings management, and signalling effects. Journal of Accounting and Economics, 28, 1–25.
Alali, F., & Jaggi, B. (2011). Earnings versus capital ratios management: role of bank types and SFAS 114. Review of Quantitative Finance and Accounting, 36(1), 105–132. https://doi.org/10.1007/s11156-010-0173-4.
Anandarajan, A., Hasan, I., & McCarthy, C. (2007). Use of loan loss provisions for capital, earnings management and signalling by Australian banks. Accounting & Finance, 47, 357–379. https://doi.org/10.1111/j.1467-629X.2007.00220.x.
Azzali, S., Fornaciari, L., & Mazza, T. (2014). Earnings management in bank industry. Economia Aziendale Online, 5(2), 99–110.
Beatty, A., et al. (1995). Managing financial reports of commercial banks the influence of taxed, regulatory capital and earnings. Journal of Accounting Research, 33, 231–261.
Beaver, W., & Engel, E. (1996). Discretionary behaviour with respect to allowances for loan losses and the behaviour of security prices. Journal of Accounting and Economics, 22, 177–206.
Collins, J., Shackelford, D., & Wahlen, J. (1995). Bank differences in the coordination of regulatory capital, earnings and taxes. Journal of Accounting Research, 33(2), 263–292.
Dantas, J. A., De Medeiros, O. R., & Lustosa, P. R. (2013). The role of economic variables and credit portfolio attributes for estimating discretionary loan loss provisions in Brazilian Banks. Brazilian Business Review, 10(4), 65–90. https://doi.org/10.15728/bbr.2013.10.4.3.
Das, S., Vaish, A., & Goel, U. (2012). Does loan loss provision signal income smoothing? An empirical investigation of Indian banking industry. IUP Journal of Accounting Research & Audit Practices, 11(2), 58.
Desta, T. S. (2017). Consequences of loan loss provisions on earnings management behaviour: A study on the best african commercial banks. South African Journal of Business Management, 48(3), 1–11.
Elleuch, S. H., & Taktak, N. B. (2015). Earnings management and evolution of the banking regulation. Journal of Accounting in Emerging Economies, 5(2), 150–169.
Ghosh, S. (2007). Loan loss provisions, earnings, capital management and signalling: Evidence from Indian Banks. Global Economic Review, 36(2), 121–136.
Greenawalt, M., & Sinkey, J., Jr. (1988). Bank loan loss provisions and the income smoothing hypothesis: An empirical analysis, 1976–1984. Journal of Financial Services Research, 1, 301–318.
Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365–383.
Kanagaretnam, K., Lobo, G. J., & Mathieu, R. (2003). Managerial incentives for income smoothing through banks loan loss provisions. Review Of Quantative Finance And Accounting, 20, 63–80.
Kim, M., & Kross, W. (1998). The impact of 1989 changes in bank capital standards on loan loss provisions and loan write-offs. Journal of Accounting and Economics, 25, 69–99.
Kwak, W., Lee, H.-Y., & Eldridge, S. W. (2009). Earnings management by Japanese Bank managers using discretionary loan loss provisions. Review Of Pacific Basin Financial Markets And Policies, 12(1), 1–26.
Liu, C., Ryan, S., & Wahlen, J. (1997). Differential valuation implications of loan loss provisions across banks and fiscal agents. The Accounting Review, 72, 133–146.
Moyer, S. E. (1990). Capital adequacy regulations and accounting choices in commercial banks. Journal of Accounting and Economics, 12, 123–154.
Scholes, M., Wilson, G. P., & Wolfson, M. (1990). Tax planning, regulatory capital planning, and financial reporting strategy for commercial banks. Review of Financial Studies, 3, 625–650.
Wetmore, J. L., & Brick, J. R. (1994). Loan loss provisions of commercial banks and adequate disclosure: A note. Journal of Economics and Business, 46, 299–305.
Yeh, T. (2010). Bank loan loss provision decisions: Empirical analysis of Taiwanese banks. Journal of Financial Services Marketing, 14 (4), 278–289.
Zoubi, T. A., & Al-Khazali, O. (2007). Empirical testing of loss provisions of banks in the GCC Region. Managerial Finance, 33(7), 500–511.
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Vishnani, S., Agarwal, S., Agarwalla, R. et al. Earnings Management, Capital Management and Signalling Behaviour of Indian Banks. Asia-Pac Financ Markets 26, 285–295 (2019). https://doi.org/10.1007/s10690-018-09265-x
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10690-018-09265-x