Earnings Management Modelling in Banks - A Framework

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Accounting research has extensively debated the modelling of Earnings Management (EM) for all industries but the baking industry. We provide a first analysis of the validity, strengths and weaknesses of existing loan loss provisioning (LLP) models and develop an extensive framework for modelling components. We rely on US data from 2000-2018 and apply prevalent test procedures that examine the extent of measurement errors, extreme performance, omitted-variable biases and predictive power of each of the models. The results indicate that established modelling can be optimized with regard to measurement errors, omitted-variable biases and predictive power. In particular, we find that including net charge offs is less important while a non-performing loan component is indispensable. In addition, our results reveal that LLP models are less prone to measurement errors related to one-step vs. two-step modelling, while more advanced estimation approaches are not linked to better prediction power.

Daniel Schaupp
Daniel Schaupp
Assistant Professor of Accounting

My research interests include transparency, opportunisitc behavior in organizations and performance evaluation and feedback systems.