We study the effects of country-level accounting enforcement on earnings quality of banks and whether bank regulation substitutes or complements the effect of accounting enforcement on bank earnings quality. We also examine whether the influence of accounting enforcement on bank earnings quality changed after the global financial crisis. Using a sample of listed banks from 40 countries between 2001 and 2014, and abnormal loan loss provisions (ALLP) as our main proxy for earnings quality, we document a consistent and strong association between accounting enforcement and bank earnings quality. More specifically, an increase in accounting enforcement decreases the level of ALLP and decreases the propensity to manage earnings to avoid losses. Furthermore, we provide empirical evidence that bank regulation complements the effect of accounting enforcement on bank earnings quality. Finally, unlike in the pre-crisis period, we find a positive association between accounting enforcement and income-decreasing ALLP in the post-crisis period, which indicates that stronger accounting enforcement is associated with more conservative earnings and higher loan loss reserves. Overall, our results indicate that accounting enforcement reduces opportunistic earnings management.

Additional Metadata
Keywords Accounting enforcement, Bank regulation, Earnings benchmarks, Earnings quality, Global financial crisis, Loan loss provisions
Persistent URL dx.doi.org/10.1016/j.jaccpubpol.2018.09.003, hdl.handle.net/1765/110475
Journal Journal of Accounting and Public Policy
Citation
Dal Maso, L, Kanagaretnam, K. (Kiridaran), Lobo, G.J. (Gerald J.), & Terzani, S. (2018). The influence of accounting enforcement on earnings quality of banks. Journal of Accounting and Public Policy. doi:10.1016/j.jaccpubpol.2018.09.003