دانلود رایگان مقاله انگلیسی قرار گرفتن در معرض ارزش منصفانه و استفاده از اختیارات بانکی از طریق رویدادهای وام - SSRN 2017

ABSTRACT

In this study, we examine whether banks’ use of the loan loss provision (LLP) to manage earnings is associated with 1) the extent to which banks hold assets subject to fair value reporting and 2) the use of an industry specialist auditor. We find that banks with a greater proportion of assets subject to fair value reporting (i.e., higher fair value exposure) use less LLP-based earnings management but more transaction-based earnings management (i.e., earnings management achieved by timing the realization of gains/losses). We also find that banks engaging industry specialist auditors use less LLP-based earnings management. Our findings suggest that banks’ use of the LLP to manage earnings is more limited when they have access to alternative earnings management tools and when they engage an auditor with more industry knowledge. Our results should be informative to regulators, members of the banking industry, and academics interested in the earnings management behavior of banks.

Conclusion

We examine the relation between our proxy for earnings management flexibility — the proportion of assets reported at fair value (which we refer to as “fair value exposure”) — and the extent to which banks use discretion over the LLP to smooth reported earnings. We suggest that banks with more fair value exposure have access to a different set of earnings management tools, and are thus able to substitute accrual-based earnings management (using the discretionary LLP) with transaction-based earnings management (using realized gains and losses). We also examine whether auditor industry specialization affects LLP-based earnings management.

We find that fair value exposure is negatively associated with the use of the discretionary LLP to smooth earnings, and positively associated with the extent to which banks trade off LLPbased and transaction-based earnings management. We also find that the use of an industry specialist auditor mitigates the extent to which banks use the discretionary portion of the LLP to smooth earnings, especially for banks with lower exposure to fair value. Our results suggest that a different set of earnings management tools are available to banks that hold more alternative financial assets, and that the ability to smooth earnings is mitigated by use of industry specialist auditors. Our findings contribute to our understanding of the roles that asset composition and auditor industry specialization play in banks’ earnings management decisions.

Our findings are should be informative to regulators, members of the banking industry, and academics interested in the earnings management behavior of banks. They suggest that as banks choose to hold more assets subject to fair value reporting, they have a different and potentially less visible set of earnings management tools available to achieve desired earnings outcomes. These results are also important because they reflect determinants of the discretionary LLP reported using the current incurred loss model. These determinants are important to document in part because for fiscal years beginning after December 15, 2019 (2020), public (private) banks will adopt an alternative model—the current expected loss model—to calculate the provision (following FASB ASU 2016-13), and the new model will could lead to different estimates of the LLP.