nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2006‒12‒16
two papers chosen by
Alexander Harin
Modern University for the Humanities

  1. The use of loan loss provisions for capital management, earnings management and signalling by Australian banks By Anandarajan , Asokan; Hasan , Iftekhar; McCarthy , Cornelia
  2. Taxing Consumption and Other Sins By James R. Hines Jr.

  1. By: Anandarajan , Asokan (School of Management, New Jersey Institute of Technology); Hasan , Iftekhar (Rensselaer Polytechnic Institute, Bank of Finland Research); McCarthy , Cornelia (School of International and Public Affairs, Columbia University)
    Abstract: The objective of this study is to examine whether and to what extent Australian banks use loan loss provisions (LLPs) for capital management, earnings management and signalling. We examine if there were changes in the use of LLPs due to the implementation of banking regulations consistent with the Basel Accord of 1988 which made loan loss reserves no longer part of Tier I capital in the numerator of the capital adequacy ratio. We find some evidence to indicate that Australian banks use LLPs for capital management, but no evidence of a change in this behaviour after the implementation of the Basel Accord. Our results indicate that banks in Australia use LLPs to manage earnings. Further, listed commercial banks engage more aggressively in earnings management using LLPs than unlisted commercial banks. We also find that earnings management behaviour is more pronounced in the post-Basel period. Overall, we find a significant understating of LLPs in the post-Basel period relative to the pre-Basel period. This indicates that reported earnings may not reflect the true economic reality underlying those numbers. Finally, Australian banks do not appear to use LLPs for signalling future intentions of higher earnings to investors.
    Keywords: capital management; earnings management; signalling; Australian banks
    JEL: C23 G14 M41
    Date: 2006–12–14
  2. By: James R. Hines Jr.
    Abstract: Throughout American history, the U.S. federal and state governments have imposed excise taxes on commodities such as alcohol and tobacco (and more recently, gasoline and firearms). Rates of such "sin" taxation, and consumption taxation broadly (including sales taxes and value-added taxes), are currently much lower in the United States than they are in Europe, Japan, and other affluent parts of the world. In part, this reflects relative government sizes, but that is not the whole story, since even controlling for total tax collections, levels of national income, government decentralization, and openness to international trade, the United States imposes unusually low excise and consumption taxes. As a result, the United States relies to a much greater degree than other countries on personal and corporate income taxes, thereby affording fewer opportunities to use the tax system to protect individuals and the environment by discouraging the consumption of "sinful" commodities, and instead simply discouraging saving and investment.
    JEL: H20 H23 H71
    Date: 2006–12

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