Discretionary Accruals in Italian Private Firms and Non-Linear Bank Loan Granting

Anteprima

This paper investigates whether and at what extent private firms reduce the quality of their accruals in order to signal a better portrait to the bank and obtain new or larger bank loans. We measure earnings discretionary accruals of a sample of Italian private firms, testing whether new and larger bank loans are associated with a higher (lower) quality of earnings in borrowers’ financial reporting. We study bank loan levels and changes and how they impact discretionary accruals and found that, surprisingly, private firms’ discretionary accruals are systematically positively affected by an increase in bank loans, although they are negatively affected by the credit worthiness rating assigned to the borrowers. We find that the monitoring role of the banking system with regard to the adoption of discretionary accruals is effective only when the loan is very large. This paper may have implications for policy-makers as it contributes to the understanding of the shortcomings of the banking regulatory system. This is an extremely relevant issue since the excessive amount of non-performing loans held by Italian banks recently threatened the stability of the European Banking Union as a whole.

Keywords: Discretionary accruals, private firms, bank loans, non-performing loans, private loans.

Bibliografia
  1. Ahn S. and Choi W. (2009), The role of bank monitoring in corporate governance: Evidence from borrowers’ earnings management behavior, Journal of Banking and Finance, 33, pp. 425-434.
  2. Bartoli F., Ferri G., Murro P. and Rotondi Z. (2010), What’s special about banking in Italy? Lending technologies, complementarity, and impact of soft Information, in Bracchi G. and Masciandaro D. (eds.), “Nuovi equilibri in finanza: le banche, le imprese e lo stato”. The XV Report on Financial System, Italian Banking Association.
  3. Banca d’Italia (2017), “Rapporto sulla stabilità finanziaria”, 5 (2013), — www.bancaditalia.it (retrieved 1st april).
  4. Barisitz S. (2017), “Nonperforming loans in western europe – A selective comparison of countries and national definitions”, Oesterreichische Nationalbank, Focus on European Economic Integration, Q1/13, — https://www.oenb.at/dam/jcr:bef7ec58-d7de-4bf1-a39d-accf0d339f3e/feei_2013_q1_studies_barisitz_tcm16-253775.pdf (retrie¬ved 1st april).
  5. Boucher Breuer J. (2006), Problem bank loans, conflicts of interest, and institutions, Journal of Financial Stability, 2, pp. 266-285.
  6. Bowman L. (2016), Too big to bail, Euromoney, September, pp. 76-81.
  7. Cassar G., Ittner C.D. and Cavalluzzo K.S. (2015), Alternative information sources and information asymmetry reduction: Evidence from small business debt, Journal of Accounting and Economics, 59, pp. 242-263.
  8. Dechow P.M. and Dichev I.D. (2002), The quality of accruals and earnings: The role of accrual estimation errors, The Accounting Review, 77, pp. 35-59.
  9. Dechow P.M., Hutton A., Kim J. and Sloan R. (2012), Detecting earnings management: A new approach, Journal of Accounting Research, 50, pp. 275-334.
  10. Dechow P.M., Sloan R.G. and Sweeney A.P. (1995), Detecting earnings management, The Accounting Review, 70, pp. 193-225.
  11. Feess E. and Hege U. (2012), The Basel Accord and the value of bank differentiation, Review of Finance, 16, pp. 1043-1092.
  12. Granger C.W.J. (1980), Testing for causality, Journal of Economic Dynamics and Control, 2, pp. 329-352.
  13. Granger C.W.J. (1988), Causality, cointegration and control, Journal of Economic Dynamics and Control, 12, pp. 551-559.
  14. Gerakos J. (2012), Discussion of detecting earnings management: A new approach, Journal of Accounting Research, 50, pp. 335-348.
  15. Healey P.M. and Whalen J.M. (1999), A review of the earnings management literature and its implications for standard settings, Accounting Horizons, 13, pp. 365-383.
  16. Jones J.J. (1991), Earnings management during import relief investigations, Journal of Accounting Research, 29, pp. 193-228.
  17. Kang J., Shivdasani A. and Yamada T. (2000), The effect of bank relations on investment decisions: An investigation of Japanese takeover bids, Journal of Finance, 55, pp. 2197-2218.
  18. Khalil F. and Parigi B. (1998), Loan size as a commitment device, International Economic Review, 39, pp. 135-150.
  19. Leuz C., Nanda D. and Wysocki P. (2003), Earnings management and investor protection: An inter-national comparison, Journal of Financial Economics, 69, pp. 505-527.
  20. Mafrolla E. and D’Amico E. (2017), Borrowing capacity and earnings management: An analysis of private loans in private firms, Journal of Accounting and Public Policy, 36, forthcoming.
  21. Maggi B. and Guida M. (2011), Modelling non-performing loans probability in the commercial banking system: Efficiency and effectiveness related to credit risk in Italy, Empirical Economics, 41, pp. 269-291.
  22. Ohlon J.O. and Shroff P.K. (1992), Changes versus levels in earnings as explanatory variables for returns: Some theoretical considerations, Journal of Accounting Research, 30, pp. 210-226.
  23. Repullo R. and Surez J. (2004), Loan pricing under Basel capital requirements, Journal of Financial Intermediation, 13, pp. 496-521.
  24. Trombetta M. and Imperatore C. (2014), The dynamic of financial crises and its non-monotonic effects on earnings quality, Journal of Accounting and Public Policy, 33, pp. 205-232.
  25. White H. (1980), A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity, Econometrica, 48, pp. 817-838.