Loan Loss Provision and Earnings Management in Nigerian Deposit Money Banks

Abstract

Researchers and financial economists have for long identified that bank managers use loan loss provisions which is a substantial accrual in the banking industry to manage reported earnings in line with the prediction of the agency theory. In Nigeria, this practice remains a mere theoretical insinuation because there are hardly any empirically documented evidences to support the assertion. In order to fill this void in literature, the present study explores the relationship between loan loss provision and earnings management in Nigerian DMBs. Secondary data were obtained from the 8 banks’ annual reports for the period of 2006 to 2011 and robust regression was used as a tool for data analysis. The result indicates that there is a positive relationship between the provision for loan losses and earnings management in Nigerian DMBs. It is therefore, recommended that, if emphasis is on the integrity of financial reports, regulators should put a ceiling on the provision for loan losses rather than leaving it at the total discretion of managers who provide it to suit their selfish interest.

DOI: 10.5901/mjss.2014.v5n17p49