How do Ownership Characteristics Affect Accounting Quality in the Banking Sector? –A Quantitative Study of US Banks

Abstract: This paper investigates the effect of ownership characteristics on US banks’ accounting quality from a stakeholder perspective. The accounting quality within the banking industry is of major importance for the domestic financial stability as banks are the core of financial intermediations. Impairment of credit loans is an accounting area exposed to the subjective judgment of managers since the regulation for financial instruments is principle based, giving managers a leeway when determining the loan loss provision. Given the leeway, managers might have certain incentives to manipulate loan loss provisions in order to obtain different objectives. The nature of the owners and consequently the unique characteristics of different ownership forms are hypothesized to affect the managers’ incentives in various ways. As a result of manipulation or inaccurate estimations of loan loss provisions the accounting quality is affected negatively as the financial reports do not reflect the reality, and banks can be perceived to have lower risk than they actually have. By collecting data from American private, listed and savings banks between 2003 and 2013 a regression analysis is performed to examine the differences in accounting quality between the ownership forms. The findings document that accounting quality in listed banks is lower compared to non-listed banks. However, the accounting quality regarding other ownership forms was not proven to differ. The results of this study contributes to the field by providing additional knowledge of how different ownership constellations might affect the accounting quality in the banking industry and consequently, the quality of information provided to stakeholders. The knowledge could benefit several stakeholders, for example to enable bank regulators to choose the proper set of regulations.