Does Ownership have an Effect on Accounting Quality?

Abstract

Research on accounting quality in banks has evolved around the manipulation of the Loan Loss Provision and has been discussed in terms of earnings management and income smoothing. Key variables used to explain the manipulation of Loan Loss Provisions have been investor protection, legal enforcement, financial structure and regulations. This study will extend previous research by investigating the effect of state, private, savings and cooperative ownership on accounting quality. In this study data from more than 600 major banks were collected in the European Economic Area, covering annual reports between 2005 and 2011. Similar to prevalent research, the Loan Loss Provision is used as a central indicator of accounting quality. In contrast to existent literature, accounting quality is not explained by the manipulation of the Loan Loss Provision in terms of income smoothing or earnings management. Instead, accounting quality is addressed in terms of validity and argued to be an outcome of the predictive power of the Loan Loss Provision in forecasting the actual outcome of credit losses. The findings of this study confirm that ownership has an effect on accounting quality. All but one form of ownership investigated showed significant differences. State ownership was found to have a positive effect on accounting quality, both in comparison to private banks and all other banks. On the other hand, savings ownership was shown to have a negative impact on accounting quality compared to private and other banks. Cooperative ownership also showed a negative impact on accounting quality compared to private and other banks, yet to a substantially larger extent. No significant results were obtained for private ownership. Other results of this study included the distribution of ownership in the European Economic Area. With 50 % of all studied banks, private ownership was the dominant form of ownership in the EEA. Cooperative and savings banks were common with 23 % and 19 % respectively, whereas state owned banks with 8 % constituted the least frequent form.