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This study aims to test whether loan loss provisions in Islamic banks is procyclical by explicitly examining the link between non-discretionary provisions and loan growth. In the next stage, this paper tests whether the link between non-discretionary provisions and loan growth is conditional on bank capitalization and lending. This is to identify whether bank-specific factors affect the procyclicality of non-discretionary provisions and whether such procyclicality can be explained by income smoothing in banks with different capitalization and loan profiles.

This study is conducted in four stages. The first stage identifies the determinants of loan loss provisions. The second stage investigates whether income smoothing is affected by capitalization and lending activities. In the third stage, the link between non-discretionary provisions and loan growth is examined. In the fourth stage, this paper tests whether the link between non-discretionary provisions and loan growth is affected by bank capitalization and lending. A two-way panel-fixed effect model is used.

Non-discretionary provisions are procyclical, particularly for banks with lower capitalization and lending activities, because such banks do not conduct income smoothing. Specifically, banks with lower capitalization experience a decline in loan growth when non-discretionary provisions to cover credit risk increase.

The dataset used in this study follows Soedarmono et al. (2017) and does not enable to differentiate types of financing products in Islamic banks that may exacerbate or mitigate the procyclicality of non-discretionary provisions.

This paper extends prior literature on the procyclicality of loan loss provisions by specifically investigating the influence of non-discretionary provisions on loan growth in Islamic banks and whether such relationship depends on the role of income smoothing undertaken by banks with different levels of capitalization and lending. This paper builds on the work of Soedarmono et al. (2017) in which they do not explicitly examine the relationship between loan loss provisions and loan growth.

The purpose of this paper is to investigate the non-discretionary determinants of bank loan loss provisions in Africa after controlling for macroeconomic fluctuation, financial development and investor protection.

The author uses static and dynamic regression estimation to test for the determinants of bank loan loss provisions.

The author finds that non-performing loans (NPL), loan-to-asset ratio and loan growth are significant non-discretionary drivers of bank provisions in the African region. The author observes that bank provision is a positive function of NPL up to a threshold beyond which bank provisions will no longer increase as NPL increases. Also, bank loan-to-asset ratio is a significant driver of bank provisions when African banks have higher loan-to-asset ratios. The author finds that larger banks in financially developed African countries have fewer loan loss provisions while increase in bank lending leads to fewer bank provisions in countries with strong investor protection. Finally, higher bank lending is associated with higher bank provisions during economic boom.

This study is the first to assess the determinants of non-discretionary bank provisions in Africa as part of micro-prudential surveillance of banks in the African region.

This study aims to examine the effect of equity incentives on earnings management that occurs via the use of loan loss provisions by using a sample of 204 bank-year observations over the period 2006-2011.

The authors use the data of 39 European banks to test the main hypothesis. Several valuation models and regressions are used to measure the main proxies for executives’ compensation and the determinant factors of loan loss provisions.

The empirical results reveal that earnings management that occurs via discretionary loan loss provisions is associated with equity incentives in the banking industry. In particular, European banks’ executives with high equity incentives are found to manage reported earnings upwards by reducing loan loss provisions. The results therefore show that income-increasing earnings management via discretionary loan loss provisions is widely practised by the executives of European banks and that this is partly motivated by executives’ compensation.

The findings of this paper present important implications for regulators in the European Union, who should take further steps to reform the regulatory environment to monitor and mitigate the earnings management practices that occur via the manipulation of loan loss provisions. Earnings management practices do not just negatively affect subsequent performance but are also found to lead to firms’ failure. Thus, regulators should take the necessary reforms to protect the wealth of stakeholders (investors, creditors, etc.).

This study provides the first evidence on the relationship between equity incentives and earnings management in the European banking industry. The study sheds more light on an issue of great interest to a broad audience that does not receive much attention in the prior research, thus opening new avenues for future research.

Prior research demonstrates that share prices reflect a risk premium that is associated with earnings variability. This suggests that managers can reduce the cost of capital and increase share prices by reducing earnings variability. In this study, we investigate bank managers' use of discretion in estimating loan loss provisions (LLP) to reduce earnings variability. We find that banks with relatively high pre‐managed earnings have positive discretionary LLP and banks with relatively low pre‐managed earnings have negative discretionary LLP, results that are consistent with the hypothesis of earnings management to reduce earnings variability. In addition, we find that bank managers' decisions to reduce earnings variability are related to the need for external financing and to gains and losses on the sale of securities which serve as substitutes for accomplishing their objective of earnings variability reduction.

The purpose of the study is to investigate whether discretionary ‘loan loss provisioning’ by Western European banks is driven by income smoothing or credit risk considerations.

To test the income smoothing hypothesis, the study uses ordinary least square regression to examine the relation between loan loss provisions and earnings before tax and loan loss provisions in the post-financial crisis period.

The authors find evidence that discretionary provisioning by Western European banks is driven by income smoothing incentives in the post-financial crisis period, particularly, among listed banks. Also, it is observed that discretionary provisioning is significantly influenced by credit risk factors, mainly, non-performing loans and loan growth. Also, it is found that discretionary provisioning by Western European banks is procyclical with fluctuations in the economic cycle. Overall, the implication of the findings is that discretionary provisioning among Western European banks is driven by both income smoothing and credit risk considerations.

This study focus on banks in Western Europe in contrast to prior European studies.

The purpose of this paper is to examine the earnings management practices of Tunisian banks after the publication of the first International Monetary Fund (IMF) report (2002) over the period 1998-2007.

The study relies on a mixed model that combines both the quantitative and qualitative approaches. First of all, we use the quantitative method to measure the discretionary loan loss provisions based on the model of Cornett et al. (2009), and then we validate the quantitative findings by using the interview approach.

Since 2005, Tunisian banks have resorted less and less to accounting earnings management through the loan loss provisions, but conversely, real earnings management has been revealed instead by the sale of investment securities and the use of debt collection agencies. Despite the IMF recommendations, Tunisian banks continue to manage their earnings by changing only their strategies.

The findings of this study show that the regulation cannot avoid earnings management. Even if the regulation limits the discretion of the manager, the latter finds new alternatives to manipulate the earnings.

This is the first study that analyses the impact of the IMF recommendations on earnings management in an emerging economy.

The purpose of this paper is to investigate the relationship between book‐tax differences and earnings quality for commercial banks in Taiwan. The paper focuses on the banking industry because industry‐specific accrual models of accounting discretion in the loan loss provisions are available to develop powerful tests of earnings management related to book‐tax differences. In addition, the paper replicates the analysis of book‐tax differences that previous studies conducted on a heterogeneous sample of nonfinancial firms, to ascertain whether prior inferences also hold in the study's sample of banks in an emerging economy.

This paper estimates the magnitude of discretionary loan loss provisions as a proxy for earnings quality (positively correlated with earnings management; therefore, inversely correlated with earnings quality). Then, the study partitions the sample into three subsamples (large positive book‐tax differences, large negative book‐tax differences, and small book‐tax differences) to set the regression models.

This paper finds that bank‐years with large positive or negative temporary book‐tax differences have discretionary loan loss provisions that are greater than bank‐years with small temporary book‐tax differences. The paper also finds that bank‐years with large temporary book‐tax differences have one‐year‐ahead persistence of current earnings and accruals that are less than those with small temporary book‐tax differences. Additionally, the study does not find a significant relation between permanent book‐tax differences and earnings quality. Overall, the evidence is consistent with the supposition that large temporary book‐tax differences are associated with lower earnings quality.

The study contributes to the literature on book‐tax differences and earnings quality in two ways. First, the paper provides evidence to ascertain prior inferences that the association between book‐tax differences and earnings quality also hold in the banking industry, it may generalize to the banking sector in other emerging countries. Second, the study utilizes a banking‐specific accrual model to construct more powerful tests of information in book‐tax differences for earnings quality. The study has an inherent limitation arising from small sample size of the banking industry in an emerging economy. Future tax accounting researchers should develop appropriate country‐specific measures of book‐tax differences.

The study focuses on the banking industry because industry‐specific accrual models of accounting discretion in the loan loss provisions are available to develop powerful tests of earnings management related to book‐tax differences. In addition, the study replicates the analysis of book‐tax differences that previous studies conducted on a heterogeneous sample of nonfinancial firms, to ascertain whether prior inferences also hold in the sample of banks in an emerging economy.

This study aims to examine the determinants of the allowance for loan losses (ALL) and loan loss provisions (LLP) for banks in the Middle East and North African (MENA) region using both a two-stage approach and simultaneous equation system to address the potential problem of estimation bias introduced by estimating the ALL and LLP separately. The paper also tests three competing hypotheses: the earnings management hypothesis, the capital management hypothesis, and the signaling hypothesis.

The authors adopt a simultaneous equation and three-stage approaches to test whether MENA banks jointly determine LLP and ALL and the determinants of the two accounts. The sample consists of all available electronic data for 75 banks (451 bank-year observations) in nine MENA countries over the period 2000-2008.

Evidence suggests that the two accounts are jointly determined. The results support the earnings management hypothesis – meaning that MENA banks have engaged in year-to-year income smoothing. The authors also find that LLP and ALL provide signals about future earnings.

The authors acknowledge that the LLP account is only one of many accounts on the income statement that could be used for signaling or to manage earnings, and that the ALL is one of several accounts that could be used for signaling, earnings or capital management. Future studies could examine other accruals for their role in managing earnings, signaling and capital.

The results indicate that bank managers use LLP and ALL accounts to manage earnings management, policy makers may want to limit the ability of banks to manipulate earnings.

Prior research on the loan loss accounting practices has been based on single equation models of the determinants of LLP and ALL. An issue that has not been adequately addressed in this literature is that ALL and LLP may be interrelated and jointly determined by banks. If the two accounts are not independent of each other, failure to include one when estimating the other may lead to an omitted variable problem, while including both in the same equation induces a potential simultaneity bias. The study is the first empirical work examining whether ALL and LLP are jointly determined by banks. By jointly estimating LLP and ALL, the study permits an assessment of the magnitude of the potential error from adopting ordinary least squares estimation of a single equation model.

The purpose of this paper is to study earnings management practices of Islamic banks and conventional banks in the Middle East region. First, the authors examine factors that may influence Islamic banks managers' use of discretion in reporting loan loss provisions (LLP). Second, the authors investigate differences that may exist between Islamic banks and non-Islamic banks in terms of discretionary loan loss provisions (DLLP) used to manipulate accounting earnings.

This empirical study uses an unbalanced panel data of 21 Islamic banks, 18 conventional banks with Islamic windows and 33 conventional banks, from seven Middle East countries during a period that ranges from 2000 to 2008. The authors use a two-stage approach in order to examine factors that may influence the use of discretion by Islamic banks' managers.

The empirical results reveal that Islamic banks use DLLP for both earnings and capital management. External financing is also found to be a determinant of DLLP. Additional findings show no significant differences among Islamic banks, conventional banks with Islamic windows and conventional banks in using DLLP. These three groups of banks behave similarly in terms of discretion based on DLLP.

The findings are potentially useful for regulators, auditors and investors. This study provides regulators with insights to strengthen their financial regulations in order to improve accounting quality. In addition, it helps auditors when considering the provisioning policies adopted by banks in order to detect specific manipulations of accounting earnings. The results may also help investors to focus on the impact of managerial discretion on accounting earnings for evaluation purposes.

This study contributes to the literature on Islamic banking. On the one hand, it extends prior research by examining the discretionary component of LLP, instead of being restricted to total LLP. On the other hand, it compares the use of discretion among three groups of banks: full Islamic banks, conventional banks with Islamic windows and full conventional banks.

The purpose of this paper is to examine bank loan loss provisioning behavior during election years – focusing on the effect of elections on banking sector loan loss provisioning.

Regression analysis was used to analyze the behavior of bank loan loss provisioning in developed countries during election years.

The findings reveal that the banking sectors in developed countries have higher loan loss provisions (LLPs) in election years. Also, income smoothing is present in election years which supports the income smoothing hypothesis. Also, banking sectors with high capital levels have higher LLPs. Although, there were no significant differences in bank loan loss provisioning during election years across the four bloc, the EU banking sectors and the banking sectors of BIS member countries generally have higher LLPs while the non-EU banking sectors and the banking sectors of the G7 member countries generally have fewer LLPs.

The literature has not explored the effect of political factors such as “election-year risk” on the managers’ discretion in banks. This is the first study that explores the effect of political change on managerial discretion in banks.