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Managing Specific Accruals vs. Structuring Transactions:
Evidence from Loan Loss Provisions and Loan Transfers in the Banking Industry
Dechun Wang,
University of Nebraska - Lincoln
Xiaoyan Cheng, University of Nebraska - Lincoln
ABSTRACT. This study compares earnings management through managing specific accruals with earnings management through structuring transactions in the banking industry. We predict that banks manage loan loss provisions more pervasively than, and ahead of, structuring loan transfers. Empirical results show that banks manage loan loss provisions to meet or beat earnings’ benchmarks regardless of the incentives for manipulating gains from loan sales and securitizations. In addition, we find that loan loss provisions are managed to a limit before loan transfers are structured. Moreover, the earnings of banks with lower loan loss provisions and higher gains from loan sales and securitizations are the least informative, suggesting that investors are more concerned about the quality of earnings when banks use both loan loss provisions and gains from loan sales and securitization to meet or beat earnings benchmarks.
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