On the assessment of the performance in earnings management for the banking industry: the case of China's banks

Abstract

Earnings management is popular in the banking industry. Earnings can be manipulated by discretionary loan loss provisions (DLLP). Analysing the trajectories of banks' DLLP (i.e. their change in DLLP over time) is an effective way to assess the performance in earnings management for the banking industry, but seems not to have been addressed in the earnings management literature. In this study, we analyse the trajectories of DLLP with the yearly data from 2007 through 2012 for four types of banks in China. The results have indicated that state-owned banks, policy banks and city commercial banks seem to manage earnings well. Cautionary notes about bank risks are provided.