Publicly traded versus privately held: implications for conditional conservatism in bank accounting
Rent the article at a discountRent now
* Final gross prices may vary according to local VAT.Get Access
Compared with privately held banks, publicly traded banks face greater agency costs because of greater separation of ownership and control but enjoy greater benefits from access to the equity capital market. Differences in control and capital market access influence public versus private banks’ accounting. We predict and find that public banks exhibit greater degrees of conditional conservatism (asymmetric timeliness of the recognition of losses versus gains in accounting income) than private banks. We predict and find that public banks recognize more timely earnings declines, less timely earnings increases, and larger and more timely loan losses. Although public ownership gives managers greater ability and incentive to exercise income-increasing accounting, our findings show that the demand for conservatism dominates within public banks and that the demand for conservatism is greater among public banks than private banks. Our results provide insights for accounting and finance academics, bank managers, auditors, and regulators concerning the effects of ownership structure on conditional conservatism in banks’ financial reporting.
- Ahmed, A., Takeda, C., & Thomas, S. (1999). Bank loan loss provisions: A reexamination of capital management, earnings management and signaling effects. Journal of Accounting & Economics, 28, 1–25. CrossRef
- Ang, J., Cole, R., & Lin, J. (2000). Agency costs and ownership structure. Journal of Finance, 55, 81–106. CrossRef
- Ball, R., & Shivakumar, L. (2005). Earnings quality in U.K. private firms. Journal of Accounting & Economics, 39, 83–128. CrossRef
- Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting & Economics, 24(1), 3–37. CrossRef
- Beatty, A., Chamberlain, S., & Magliolo, J. (1995). Managing financial reports of commercial banks: The influence of taxes, regulatory capital and earnings. Journal of Accounting Research, 33(2), 231–262. CrossRef
- Beatty, A., & Harris, D. (1998). The effects of taxes, agency costs and information asymmetry on earnings management: A comparison of public and private firms. The Review of Accounting Studies, 4(3/4), 299–326. CrossRef
- Beatty, A., Ke, B., & Petroni, K. (2002). Earnings management to avoid earnings declines across publicly and privately held banks. The Accounting Review, 77(3), 547–570. CrossRef
- Beaver, W., & Ryan, S. (2005). Conditional and unconditional conservatism: Concepts and modeling. The Review of Accounting Studies, 10(2/3), 269–309. CrossRef
- Christensen, J., & Demski, J. (2003). Accounting theory: An information content perspective. New York, NY: McGraw-Hill Higher Education.
- Cloyd, C. B., Pratt, J., & Stock, T. (1996). The use of financial accounting choice to support aggressive tax positions: Public and private firms. Journal of Accounting Research, 34(1), 23–43. CrossRef
- Collins, J., Shackelford, D., & Wahlen, J. (1995). Bank differences in the coordination of regulatory capital, earnings, and taxes. Journal of Accounting Research, 33(2), 263–291. CrossRef
- Demski, J. (2003). Endogenous expectations. The Accounting Review, 79(2), 519–539. CrossRef
- Greene, W. (2000). Econometric analysis. Upper Saddle River, NJ: Prentice-Hall, Inc.
- Guay, W., & Verrecchia, R. (2006). Discussion of an economic framework for conservative accounting and Bushman and Piotroski (2006). Journal of Accounting & Economics, 42, 149–165. CrossRef
- Heckman, J. (1979). Sample selection bias as a specification error. Econometrica, 47, 153–162. CrossRef
- Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 31–37.
- Kanagaretnam, K., Lobo, G., & Mathieu, R. (2003). Managerial incentives for income smoothing through bank loan loss provisions. Review of Quantitative Finance and Accounting, 20, 63–80. CrossRef
- Kwan, S. (2004). Risk and return of publicly held versus privately owned banks. FRBNY Economic Policy Review: 97–107.
- Liu, C., & Ryan, S. (1995). The effect of bank loan portfolio composition on the market reaction to and anticipation of loan loss provisions. Journal of Accounting Research, 33, 77–94. CrossRef
- Liu, C., & Ryan, S. (2006). Income smoothing over the business cycle: Changes in banks’ coordinated management of provisions for loan losses and loan charge-offs from the pre-1990 bust to the 1990s boom. The Accounting Review, 81(2), 421–441. CrossRef
- Ryan, S. (2007). Financial instruments & institutions—accounting and disclosure rules (2nd ed.). Hoboken, NJ: John Wiley & Sons, Inc.
- Watts, R. (2003). Conservatism in accounting part I: explanations and implications. Accounting Horizons, 17(3), 207–227. CrossRef
- Publicly traded versus privately held: implications for conditional conservatism in bank accounting
Review of Accounting Studies
Volume 14, Issue 1 , pp 88-122
- Cover Date
- Print ISSN
- Online ISSN
- Springer US
- Additional Links
- Private and public banks
- Agency costs
- Asymmetric timeliness
- Industry Sectors
- Author Affiliations
- 1. Johnson Graduate School of Management, Cornell University, Ithaca, NY, USA
- 2. Kelley School of Business, Indiana University, 1309 East 10th Street, Bloomington, IN, 47405-1701, USA
- 3. J. M. Tull School of Accounting, Terry College of Business, University of Georgia, Athens, GA, USA