Bank financial distress and earnings management strategies: evidence from MENA countries

Abstract

Purpose

This study investigates and compares the earnings management strategies of financially distressed and non-distressed banks.

Design/methodology/approach

Using a regression analysis, this study examines a sample of banks operating in the MENA region. We focus on real earnings management strategies via commission and fee income (CF) and accrual-based earnings management strategies via loan loss provisions (LLP). A subsample analysis was performed, lagged dependent variables and additional control variables were included as a robustness check.

Findings

The findings consistently reveal a more extensive use of real earnings management strategies via CF among distressed banks than among non-distressed ones. Specifically, banks smooth their income via CF under distress conditions. However, LLP-based earnings management strategies are only implemented in healthy banks. These behaviors persist in banks that operate under different monitoring systems and institutional settings.

Research limitations/implications

This study marks its entry into the literature debate on accounting and non-accounting decisions that influence bank financial reporting. It argues that, in the presence of financial difficulties, bank managers define earnings management strategies based on the probability of being detected, rather than looking at their costs.

Practical implications

From a prudential perspective, the findings suggest the need for prudential rules to supervise the reporting of CF income associated with high fees or discount incentives used intentionally by bank managers to convince clients to delay or accelerate payments and, consequently, affect reported earnings.

Originality/value

This study adds to the literature by investigating the effect of bank financial distress on both real and accrual-based earnings management to provide a comprehensive analysis of bank earnings management strategies in the presence of financial difficulties.

Citation

Ben Rejeb, M., Alzyadat, S. and Merzki, N. (2024), "Bank financial distress and earnings management strategies: evidence from MENA countries", Asian Review of Accounting, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/ARA-10-2023-0290