| Accounting, finance and banking researchers have studied extensively earnings management and capital ratio management by commercial banks. This dissertation has three main objectives. First, it examines the differences in the banks' managers' behavior with respect to loan loss provisions by different types of banks. Second, it examines whether the level of capitalization, i.e. well/adequately capitalized and undercapitalized banks, will have an impact on managerial behavior of loan loss provisions determination. Third, it examines whether SFAS No. 114 has modified managerial loan loss provisions behavior.; I define bank types on three dimensions. First, I define banks by size on the basis of total assets as defined by regulatory agencies; i.e. money center, regional and community banks. Second, I define banks by riskiness of bank's asset portfolio based on regulatory specified risk weighted assets under the Basel Accord of 1988. Third, I define banks by liquidity of asset's portfolio. Using a sample of U.S. commercial banks, I document evidence of earnings management and capital ratio management using loan loss provisions. I also show that the earnings management and capital ratio management using loan loss provisions differ with different types of banks.; In specific, I document evidence that money center banks, regional banks, risky banks use loan loss provisions to manage the reported earnings. I find evidence that liquid banks do not use loan loss provisions to manage capital ratios but there is limited evidence that these banks use loan loss provisions to manage the reported earnings. In addition, there is evidence that SFAS No. 114 has diminished managerial behavior with regard to earnings management and capital ratio management for some types of banks and that SFAS No. 114 has provided a closer link between level of loan loss provisions and the loan loss default variables. The findings documented in this dissertation can have regulatory implications and valuation significance. |
