قرار گرفتن در معرض ارزش منصفانه، تخصص حسابرسان و استفاده از اختیارات بانکی از طریق رویدادهای وام Fair Value Exposure, Auditor Specialization, and Banks’ Discretionary Use of the Loan Loss Provision

Introduction One of the main ways that banks achieve smooth earnings streams is by exercising discretion over the loan loss provision (LLP), which we refer to as LLP-based earnings management. LLP-based earnings management can be costly because it can attract regulatory attention (U.S. GAO, 1994; Liu & Ryan, 2006). Prior research finds that banks rely less on the LLP to manage earnings when they have alternative earnings management tools. In this paper, we hypothesize that bank holdings of financial assets exposed to fluctuations in fair value facilitate the use of realized gains and losses to manage earnings, allowing banks to escape the regulatory scrutiny associated with LLP-based earnings management. We examine whether the extent to which banks use LLP-based earnings management is reduced when they can engage in the sale of financial assets subject to fair value reporting. 1 We also examine how banks trade off LLP-based earnings management with discretion over the timing of realized gains and losses on the sale of investments, which we refer to as transaction-based earnings management. Finally, because prior research finds that auditor industry specialization mitigates accrual-based earnings management (Balsam, Krishnan, & Yang, 2003) and clients with higher quality auditors may engage in more transaction-based earnings management (Chi, Lisic, & Pevzner, 2011), we examine the association between auditor specialization, LLP-based earnings management, and fair value exposure. We focus on the banking industry because of the critical role that banks play in the economy and, more importantly, because of concerns about the financial reporting quality (and ultimate viability) of banks. Prior research suggests that managers in the banking industry use the increased flexibility allowed under fair value rules to make self-serving choices, which reduces he quality of accounting information (Dechow & Shakespeare, 2009; Dechow, Myers, & Shakespeare, 2010; Kilic, Lobo, Ranasinghe, & Sivaramakrishnan, 2013).2 We posit that their ability to use transaction-based earnings management depends, in part, on the extent to which banks hold assets exposed to fair value changes. Providing evidence on the association between bank exposure to fair values and the use of discretion in the LLP is our first contribution. We follow Nissim and Penman (2007), Khan (2014), and Xie (2016) and measure the fair value exposure as the proportion of their assets and liabilities reported at fair value. 3 We posit that banks with a high proportion of their assets and liabilities subjected to fair value reporting have additional flexibility in managing earnings through realized gains or losses, so we examine whether the level of exposure to fair value is associated with the form of earnings management chosen. Specifically, we examine the extent to which exposure to fair value influences management discretion in estimating the LLP to smooth earnings.