Articoli

The Effect of Ownership and Regulation on Bank Earnings Quality an investigation of the conventional and Islamic banks in MENA region


Abstract


The study aims to examine the relationship between shareholding ownership structures, national institutional factors and earnings quality of banks across MENA countries (Middle East and North Africa). Using four distinct earnings quality measures that detect different aspects of earnings properties on a sample of 158 banks (44 Islamic banks and 114 conventional banks), the study finds that all four measures of earnings quality are higher for listed and widely held banks; and, that state-owned banks have less persistent, less predictable, and less managed earnings. Moreover, Islamic banks in MENA countries appear to have significantly higher quality of earnings than their conventional counterparts in terms of earnings persistence, cash-flows predictability and income smoothing using loan loss provisions. The study shows also that tighter supervision improves earnings reporting quality by reducing earnings management practices even in the presence of large shareholding.

 


Keywords

Ownership structure; bank regulation, earnings quality; earnings management; Islamic banks

Full Text:

PDF


DOI: http://dx.doi.org/10.13135/2421-2172/2047

References


Abaoub, E., Homrani, K. and Gamra, S. B. (2013), The determinants of earnings management: empirical evidence in the Tunisian banking industry (1999-2010), Journal of Business Studies Quarterly, Vol.4, N°3, pp:62-72.

Abdel Karim, R. A. (1990), The Independence of Religious and External Auditors: the case of Islamic Banks, Accounting, Auditing & Accountability Journal, Vol. 3, N°3, pp: 34-44.

Abdul Rahman, R. (2012), Religious ethical values and earnings quality: some evidence from Malaysia, PhD Dissertations, Massey University, Albany, New Zealand.

Aharony, J., Wang, J. and Yua,n H. (2010), Tunneling as an incentive for earnings management during the IPO process in China, Journal of Accounting and Public Policy, Vol. 29, N°1, pp:1-26.

Ahmed, A.S., Takeda, C. and Thomas, S. (1999), Bank loan loss provisions: a reexamination of capital management, earnings management and signaling effects, Journal of Accounting and Economics, Vol. 28, N° 1, pp: 1-25.

Ahrens, B. (2010), Capital market implications of earnings quality, Lohmar-Koln: Josef EulVerlagGmbH.

Altamuro, J. and Beatty, A. (2010), How does internal control regulation affect financial reporting? , Journal of Accounting and Economics, Vol.49, N°1, pp: 58-74.

Alves, S. (2012), Ownership structure and earnings management: evidence from Portugal, Australasian Accounting, Business and Finance Journal, Vol.6, N°1, pp: 57-74.

Anandarajan, A., Hasan, I. and McCarthy, C. (2007), Use of loan loss provisions for capital, earnings management and signaling by Australian banks, Accounting and Finance, Vol.47, pp: 357-379.

Ashraf, A., Hassan, M. K. and Basher, S. A. (2015), Loan Loss Provisioning in OIC Countries: Evidence from Conventional vs. Islamic Banks, Journal of King Abdulaziz University: Islamic Economics, Vol. 28, N°1, pp: 23-59.

Beatty, A. L., Ke, B. and Petroni, K. R. (2002), Earnings management to avoid earnings declines across publicly and privately held banks, The Accounting Review, Vol.77, N°3, pp: 547-570.

Beaver, W. and Engel, E. (1996), Discretionary behavior with respect to allowances for loan losses and the behavior of security prices, Journal of Accounting & Economics, Vol. 22, N° (1-3), pp: 177-206.

Ben Othman H. and Mersni H. (2014), The use of discretionary loan loss provisions by Islamic banks and conventional banks in the Middle East region: A comparative study, Studies in Economics and Finance, Vol.31, N°1, pp: 106-128.

Biurrun, M. V. (2010), Bank Earnings Management: Costs, Drivers and Remedies, Doctoral dissertation, WHU.

Bo, X. H. and Wu, L. S. (2009), The governance roles of state-owned controlling and institutional investors: a perspective of earnings management, Economic Research Journal, Vol.2, pp: 81-91.

Bouvatier, V., Lepetit, L. and Strobel, F. (2014), Bank income smoothing, ownership concentration and the regulatory environment, Journal of Banking & Finance, Vol.41, pp: 253-270.

Burgstahler, D. and Dichev, I. (1997), Earnings management to avoid earnings decreases and losses, Journal of Accounting and Economics, Vol.24, N°1, pp: 99-126.

Busta, I., Sinani, E. and Thomsen, S. (2014), Ownership concentration and market value of European banks, Journal of Management & Governance, Vol.18, pp: 159-183.

Caprio, G., Laeven, L. and Levine, R. (2007), Governance and bank valuation, Journal of Financial Intermediation, Vol.16, pp: 584-617.

Chen, C.W.K. and Yuan, H. (2004), Earnings management and resource allocation: evidence from China’s accounting-based regulation of rights issues, The Accounting Review, Vol. 79 N°3, pp: 645-665.

Chen, K.Y., Lin, K.L. and Zhou, J. (2007), Audit quality and earnings management for Taiwan IPO firms, Managerial Auditing Journal, Vol.20, N°1, pp: 86-104.

Cihák, M., Demirgüç-Kunt, A., Pería, M.S.M. and Mohseni A. (2012), Banking regulation and supervision around the world: a crisis update, World Bank Policy Research Working Paper 6286, December.

Conroy, S. J. and Emerson, T. L. N. (2004), Business ethics and religion: Religiosity as a predictor of ethical awareness among students, Journal of Business Ethics, Vol.55, pp: 373-386.

Cornett, M. M., McNutt, J.J. and Tehranian, H. (2009), Corporate governance and earnings management at large US bank holding companies, Journal of Corporate Finance, Vol.15, N°4, pp:412-430.

Curcio, D. and Hasan, I. (2015), Earnings and capital management and signaling: the use of loan-loss provisions by European banks, The European Journal of Finance, Vol. 21, N°1, pp: 26-50.

Dechow, P., Ge, W. and Schrand, C. (2010), Understanding earnings quality: A review of the proxies, their determinants and their consequences, Journal of Accounting and Economics, Vol.50, N°(2-3), pp:344-401.

Dechow, P., Sloan, R. and Sweeney, A. (1996), Causes and consequences of earnings manipulations: an analysis of firms subject to enforcement actions by the SEC, Contemporary Accounting Research, Vol.13, N°1, pp: 1-36.

Demerjian, P. R., Lev, B., Lewis, M. F. and McVay S. E. (2012), Managerial ability and earnings quality, The Accounting Review, Vol.88,N°2, pp:463-498.

Demsetz, H. and Lehn, K. (1985), The structure of corporate ownership: causes and consequences, Journal of Political Economy, Vol. 93, pp: 1155-1177.

Ding, Y., Hope, O., Jeanjean, T. and Stolowy, H. (2007), Differences between domestic accounting standards and IAS: measurement, determinants and implications, Journal of Accounting and Public Policy, Vol.26, N°1, pp:1-38.

Dyreng, S., Mayew, W.J. and Williams, C.D. (2012), Religious social norms and corporate financial reporting, Journal of Business Finance and Accounting, Vol.39, N° (7-8), pp: 845-875.

Fan, J. P.H. and Wong, T. J. (2002), Corporate ownership structure and the informativeness of accounting earnings in East Asia, Journal of Accounting and Economics, Vol.33, N°3, pp: 401-425.

Fang, Y., Hasan, I. and Li, L. (2014), Banking reform, risk-taking and earnings quality- evidence from transition countries, Bank of Finland BOFIT- Institute for Economies in Transition, Discussion paper 19/2014.

Farazi, S., Feyen, E. and Rocha, R. (2011), Bank ownership and performance in the Middle East and North Africa, Policy Research Working Paper 5620, Washington, DC, United States: World Bank.

Fonseca, A.R. and Gonzalez, F. (2008), Cross-country determinants of bank income smoothing by managing loan-loss provisions, Journal of Banking & Finance, Vol.32, pp:217-228.

Francis, J., LaFond, R., Olsson, P. M. and Schipper, K. (2004), Costs of equity and earnings attributes, The Accounting Review, Vol.79, N°4, pp: 967-1010.

Gaio, C. and Raposo, C. (2011), Earnings quality and firm valuation: international evidence, Accounting and Finance, Vol.51, pp: 467-499.

Hamdi, F. M. and Zarai, M. A. (2012), Earnings management to avoid earnings decreases and losses : empirical evidence from Islamic banking industry, Research Journal of Finance and Accounting, Vol.3, N°3, pp: 88-107.

Haw, I.M., Ho, S.S.M., Hu, B. and Wu, D. (2010), Concentrated control, institutions, and banking sector: an international study, Journal of Banking & Finance, Vol.34, N°3, pp: 485-497.

Isenmila, P. A. and Elijah, A. (2012), Earnings Management and Ownership Structure: Evidence from Nigeria, Research Journal of Finance and Accounting, Vol.3, N°7, pp: 24-36.

Jensen, M. and Meckling, W. (1976), Theory of the firm: managerial behavior, agency costs and ownership structure, Journal of Financial Economics, Vol.3, pp: 305-360.

Jung, K. and Kwon, S. Y. (2002), Ownership Structure and Earnings Informativeness Evidence from Korea, The International Journal of Accounting, pp: 301-325.

Kanagaretnam, K., Lim, C. Y., and Lobo, G. J. (2011), Effects of national culture on earnings quality of banks, Journal of International Business Studies, Vol.42, pp:853- 874.

Kanagaretnam, K., Lim, C. Y., and Lobo, G. J. (2014), Effects of international institutional factors on earnings quality of banks, Journal of Banking & Finance, Vol.39, pp:87- 106.

Kanagaretnam, K., Lobo, G. J. and Mathieu, R. (2004), earnings management to reduce earnings variability : evidence from bank loan loss provisions, Review of Accounting and Finance, Vol.3, N°1, pp:128-148.

Kennedy, E. J. and Lawton, L. (1998), Religiousness and business ethics, Journal of Business Ethics, Vol.17, pp: 163-175.

Kobeissi, N. and Sun, X. (2010), Ownership structure and bank performance: evidence from the Middle East and North Africa region, Comparative Economic Studies, Vol.52, N°3, pp: 287-323.

Kung, F. H., Cheng, C. L. and James, K. (2010), Effects of corporate ownership structure on earnings conservatism, Asian Journal of Finance & Accounting, Vol.2, N°1, pp: 47- 67.

Kung, F. H., Cheng, C. L. and James, K. (2010), Effects of corporate ownership structure on earnings conservatism, Asian Journal of Finance & Accounting, Vol.2, N°1, pp: 47- 67.

Leuz, C., Dhananjay, N. and Wysocki, P.D. (2003), Earnings management and investor protection: an international comparison, Journal of Financial Economics, Vol.69, pp: 505- 527.

Leventis, S. and Dimitropoulos, P. (2012), The role of corporate governance in earnings management: experience from US banks, Journal of Applied Accounting Research, Vol.13, N°2, pp: 161-177.

Lewis, M. K. (2001), Islam and accounting, Accounting Forum, Vol.25, N°2, pp: 103-127.

Longenecker, J. G., McKinney, J. A. and Moore, C. W. (2004), Religious intensity, evangelical Christianity, and business ethics: An empirical study, Journal of Business Ethics, Vol.55, pp: 373-386.

McGuire, S., Omer, T.C. and Sharp, N.Y (2012), The impact of religion on financial reporting irregularities, The Accounting Review, Vol.87, N°2, pp: 645-673.

Morck, R., Shleifer, A. and Vishny, R. (1988), Management ownership and market valuation: an empirical analysis, Journal of Finance Economics, Vol.20, pp: 293-315.

Naciri, A. (2008), Comparative corporate governance: The MENA countries national systems of corporate governance, Routledge Studies in Corporate Governance, New York

Penman, S. and Zhang, X. (2002), Accounting conservatism, the quality of earnings, and stock returns, The Accounting Review, Vol.77, N° 2, pp: 237-264.

Quttainah, M. A., Song, L. and Wu, Q. (2013), Do Islamic banks employ less earnings management ? Journal of International Financial Management & Accounting, Vol. 24, N°3, pp: 203-233.

Sapienza, P. (2004), The effects of government ownership on bank lending, Journal of Financial Economics, Vol.72, pp: 357-384.

Shehzad, C.T., De Hann, J. and Schltens, B. (2010), The impact of bank ownership concentration on impaired loans and capital adequacy, Journal of Banking & Finance, Vol.34, pp: 399-408.

Shen, C.H. and Chih, H.L. (2005), Investor protection, prospect theory, and earnings management: an international comparison of the banking industry, Journal of Banking & Finance, Vol.29, pp: 2675-2697.

Shleifer, A. (1998), State versus private ownership, Journal of Economic Perspectives, Vol.12, N°4, pp: 133-150.

Shleifer, A. and Vishny, R. (1986), Large shareholders and corporate control, Journal of Political Economy, Vol.94, pp: 461-488.

Taktak, N., Zouari, S. and Boudrigua, A. (2010), Do Islamic banks use loan loss provisions to smooth their results?, Journal of Islamic Accounting and Business Research, Vol.1, N°2, pp: 114-127.

Tsai, H. and Hsieh, Y.T. (2013), Who Monitor Banks? International Evidence from Effects of Large Shareholder Structure on Bank Earnings Management, International Research Journal of Applied Finance, Vol. 4, N°10, pp: 1310-1325.

Uygur, O. (2013), Earnings Management and Executive Compensation: Evidence from Banking Industry, Banking & Finance Review, Vol.5, N°2, pp: 33-54.

Wan Mohammad, M., Wasiuzzaman, S and Zaini, R. M. (2011), Panel Data Analysis of the Relationship between Earnings Management, Bank Risks, Loan loss Provision and Dividend per Share, Journal of Business and Policy Research, Vol.6, N°1, pp: 46-56.

Wang, L. and Yung, K. (2011), Do state enterprises manage earnings more than privately owned firms? the case of China, Journal of Business Finance & Accounting, Vol.38, N° (7‐ 8), pp: 794-812.

Warfield, T.D., Wild, J.J. and Wild, K.L. (1995), Managerial ownership accounting choices, and informativeness of earnings, Journal of Accounting and Economics, Vol.20, pp: 61-91.

Yeo ,G. H. H., Tan, P., Ho, K. W. and Chen, S. S. (2002),Corporate ownership structure and the informativeness of earnings, Journal of Business, Finance and Accounting, Vol.29, pp: 1023-1046.

Zhong, K., Gribbin, D.G. and Zheng, X. (2007), The effect of monitoring by outside blockholders on earnings management, Quarterly Journal of Business and Economics, Vol. 46, N° 1, pp: 1-37.

Zoubi, T. A. and Al-Khazali, O. (2007), Empirical testing of the loss provisions of banks in the GCC region, Managerial Finance, Vol.33, N°7, pp: 500-511.


Article Metrics

Metrics Loading ...

Metrics powered by PLOS ALM

Refbacks

  • There are currently no refbacks.




EJIF - European Journal of Islamic Finance has been approved for inclusion in ERIH PLUS and in DOAJ 


Indexed by
EBSCO Discovery Service e Arab World Research Source: Al Masdar


European Research Centre for Islamic Finance www.ercif.org 

Registrazione Tribunale di Torino n.: 29
data registrazione: 21.10.2014
ISSN 2421-2172
Direttore responsabile: Paolo Biancone

Università degli Studi di Torino

___________

Licenza Creative Commons

EJIF content is licensed under a Creative Commons Attribution 4.0 International License.