Research on the Relationship of Commercial Bank’s Loan Loss Provision and Earning Management and Capital Management

Xianlei Dong; Jia Liu; Beibei Hu

doi:10.4236/jssm.2012.52021

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Research on the Relationship of Commercial Bank’s Loan Loss Provision and Earning Management and Capital Management

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DOI: 10.4236/jssm.2012.52021 5,977 Downloads 10,984 Views Citations

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Xianlei Dong, Jia Liu, Beibei Hu

Affiliation(s)

China Construction Bank of Shandong Branch, Jinan, China.
School of Economics and Management, Beijing University of Technology, Beijing, China.

ABSTRACT

This paper reviewed and analyzed the development of our nation’s loan loss provision system, then studied the relations of commercial bank loan loss provision and earnings management and capital management through empirical study. This paper selected 14 domestic commercial banks of year 2001-2009 as data sample, using Kanagaretnam et al.’s (2003) research method, dividing the loan loss provision into two parts that is discretionary and nondiscretionary part, and empirically studied the relationship of discretionary part of loan loss provision and earnings before taxes and provisions (EBTP) and capital adequacy ratio (CAR). Empirical results show that: there is significant positive correlation between the discretionary loan loss provisions and earnings before taxes and provisions (EBTP), and there is significant negative correlation between the discretionary loan loss provisions and capital adequacy ratio (CAR). That provides evidence for the relation of bank loan loss provision and earnings management and capital management. In the last, combining with empirical research findings and the status of the loan loss provision system of China’s commercial banks, this paper made several suggestions to improve the system of loan loss provision.

KEYWORDS

Bank Loan Loss Provision; Earnings Management; Capital Adequacy Ratio

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

X. Dong, J. Liu and B. Hu, "Research on the Relationship of Commercial Bank’s Loan Loss Provision and Earning Management and Capital Management," Journal of Service Science and Management, Vol. 5 No. 2, 2012, pp. 171-179. doi: 10.4236/jssm.2012.52021.

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