Abstract

Using a sample of 278 commercial banks operating in OECD countries, this paper shows that numerous banks smooth their earnings intentionally either by using loan loss provisions or by selling trading securities. These banks resort more to real income smoothing than to the artificial one. Results also indicate that the banks’ propensity to smooth reported earnings depends on their exposure to prudential and curative constraints and on various institutional constraints. The degree of capitalization, the composition of regulatory equity capital and the presence of insured creditors motivate banks to smooth their results. This study also highlights that Anglo-Saxon accounting systems seem to favour smoothing behaviour probably because they provide discretion in reporting transactions.

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