Earnings smoothing and systemic risk in the banking industry

Li LI, Mary L. Z. MA, Feng WU

Research output: Other Conference ContributionsConference Paper (other)

Abstract

This study examines the relation between earnings smoothing through loan loss provision (LLP smoothing) and systemic risk in the banking sector. We find that LLP smoothing is negatively associated with a bank’s contribution to systemic risk in general and in both boom and bust periods. We further find that this association stems from the counter-cyclical cushioning role of LLP smoothing as a reaction to common risk exposure, but there is no evidence that the relation works through the mechanism of bank interconnectedness. The informativeness property of LLP smoothing or bank-specific risk does not affect the relation either. In addition, managerial characteristics influence the link between LLP smoothing and systemic risk, with the association weakening for male managers or managers with strong risk-taking incentives. Moreover, stronger monitoring over LLP smoothing by long-term debtholders, financial analysts, and Big-Four auditors is found to enhance the negative relation between LLP smoothing and systemic risk.
Original languageEnglish
Number of pages47
Publication statusPublished - 20 Jul 2019
Externally publishedYes
EventChina International Risk Forum 2019 - Nankai University, Tianjin, China
Duration: 19 Jul 201921 Jul 2019
http://cirforum.org/2019forum.htm

Conference

ConferenceChina International Risk Forum 2019
Abbreviated titleCIRF 2019
CountryChina
CityTianjin
Period19/07/1921/07/19
Internet address

Keywords

  • LLP smoothing
  • Loan loss provision
  • Systemic risk
  • Common risk exposure
  • Bank interconnectedness

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    LI, L., MA, M. L. Z., & WU, F. (2019). Earnings smoothing and systemic risk in the banking industry. Paper presented at China International Risk Forum 2019, Tianjin, China. http://cirforum.org/2019forum_papers/CIRF2019_paper_118.pdf