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

Xianlei Dong, Jia Liu, Beibei Hu

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

DOI: 10.4236/jssm.2012.52021                

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.

References

[1]	H. H. Hu and G. B. Lv, “Research on Earnings Management of China Commercial Banks upon Surplus Distributed Model,” Economic Management, Vol. 6, 2010, p. 32.
[2]	Y. C. Xu and J. X. Yang, “Research on Earnings Management Motivation and LLP of Commercial Banks,” Economic Science, Vol. 2, 2010, pp. 94-103.
[3]	B. Lu and C. Q. Li, “Research on the Capital Adequacy Ratio’s Influence to the LLP Counting and Drawing of China Commercial Banks—Investigation of Procyclical Effect and Ironing Income Effect,” Wuhan Finance, Vol. 6, 2009, pp. 56-58.
[4]	W. Li and H. Z. Xu, “Empirical Analysis on the Relationship between LLP and Surplus Management of Listed Commercial Banks,” Finance and Accounting Monthly, Vol. 5, 2011, pp. 14-15.
[5]	K. Kanagaretnam, G. Lobo and R. Mathieu, “Managerial Incentives for Income Smoothing through Loan Loss Provisions,” Review of Quantitative Finance and Accounting, Vol. 20, No. 1, 2003, pp. 63-80. doi:10.1023/A:1022187622780
[6]	A. Ahmed, C. Takeda and S. Thomas, “Bank Loan Loss Provision: A Reexamination of Capital Management, Earnings Management and Signaling Effects,” Journal of Accounting and Economics, Vol. 28, No. 1, 1999, pp. 1- 25. doi:10.1016/S0165-4101(99)00017-8
[7]	H. H. Fan and L. Y. Zhang, “Eviews Statistics Analysis and Use,” China Machine Press, Beijing, 2009.
[8]	J. Wooldridgy, “Econometric Analysis of Cross Section and Panel Data,” China Renmin University Press, Beijing, 2007. doi:10.1016/S0165-4101(99)00017-8