Bank earnings management using loan loss provisions: comparing the UK, France, South Africa and Egypt

Abstract

Purpose

This paper aims to investigate bank earnings management using loan loss provision. The paper examines income smoothing, which is a type of earnings management. It compares the income smoothing behaviour of banks in the UK, France, South Africa and Egypt.

Design/methodology/approach

The study uses the panel fixed effect regression methodology to analyse bank income smoothing.

Findings

The findings show that bank income smoothing is present in the UK and Egypt and absent in France and South Africa. Banks in Egypt used LLPs to smooth income before the global financial crisis. Meanwhile, bank income smoothing is pronounced in France during and after the financial crisis but was absent in the pre-crisis period. Also, bank income smoothing is reduced in countries that (1) have strict banking supervision, (2) adopt common law particularly the United Kingdom, and by countries that adopt civil law, particularly France and Egypt. Bank earnings management is greater in countries that (3) adopt a mixed legal system, particularly South Africa, and in countries that adopt International Financial Reporting Standards accounting standards.

Research limitations/implications

The implication of the findings is that country differences may affect banks' incentive to smooth income using loan loss provision.

Originality/value

The novelty of this paper is that it explicitly analyses specific countries that have different supervisory regimes, different structure and accounting rules.

Citation

Ozili, P.K. (2023), "Bank earnings management using loan loss provisions: comparing the UK, France, South Africa and Egypt", Journal of Economic and Administrative Sciences, Vol. 39 No. 2, pp. 354-365. https://doi.org/10.1108/JEAS-02-2021-0024