EARNINGS MANAGEMENT BY MERGER TARGETS: DISCRETION OVER THE LOAN LOSS PROVISION IN COMMERCIAL BANKS
Open Access
- Author:
- Bettinghaus, Bruce
- Graduate Program:
- Business Administration
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- October 13, 2000
- Committee Members:
- James Mckeown, Committee Member
Mark John Roberts, Committee Member
Mark William Dirsmith, Committee Member
Anne L Beatty, Committee Chair/Co-Chair - Keywords:
- Loan Loss Provision
Commercial Banks
Mergers and Acquistions
Earnings management - Abstract:
- This paper investigates the relationship between commercial banks’ accrual choices and the likelihood of their takeover. I study a sample of 2,414 commercial bank holding companies (banks) over the period of 1987 through 1998. The sample consists of 14,574 bank-years. I perform two complimentary tests to determine if the targets in bank mergers are managing their loan loss provision downward in the period prior to the merger. In the first test, I select a sample of 641 bank-years for banks in the year before they are the targets in a merger. I test for the mean difference in the loan loss provision between these target-banks and the rest of the sample after controlling for the economic determinants of the loan loss provision. I find that both public and private intrastate targets as well as private interstate targets all demonstrate a negative unexpected loan loss provision during a time-period where there is a high probability of takeover. I do not find an earnings management difference between public and private targets. In the second test, I select a sample of 116 target banks that continue to be reported as a subsidiary to their new parent. I test for a negative (positive) unexpected loan loss provision prior to (after) the merger. There is some evidence that these targets do have a negative provision prior to the merger, but they do not exhibit the expected reversing behavior.