Original scientific paper
https://doi.org/10.2478/zireb-2022-0012
Accounting Discretion, Loan Loss Provision in Financial Distress: Evidence from Commercial Banks
Amina Malik
; National Defence University, Islamabad, Pakistan
Shahab Ud Din
; Karakoram International University, Ghizer campus, Gilgit Baltistan, Pakistan
Khuram Shafi
; COMSATS University Islamabad, Pakistan
Babar Zaheer Butt
orcid.org/0000-0002-2870-0290
; Tohoku University of Community Service & Science, Japan
Haroon Aziz
; All Pakistan Textile Mills Association, Pakistan
Abstract
This study explores the association between earning management practices and financial distress in commercial banks. Earning management is measured through discretionary loan loss provisions and non-discretionary loan loss provisions. Modified Altman’s Z-score has been used as a proxy for financial distress. Panel regression with fixed and random effect has been employed for empirical analysis. The study finds a significant positive association between DLLP, NDLLP and financial distress in terms of the Altman Z-score. In the case of NDLLP, liquidity reduces the probability of financial distress. Whereas, a bank’s SIZE, LEVG and AQ enhance the likelihood of financial distress. The robustness tests were applied to find the association between NDLLP and FD using logistic regression to validate baseline estimates results of the random effect model. The findings of this study have implications for the policymakers, regulators and internal stakeholders to devise effective regulatory measures for well-informed investment decisions.
Keywords
Financial distress; Z-Score; Discretionary loan loss provisions and Non-discretionary loan loss provisions
Hrčak ID:
286071
URI
Publication date:
21.11.2022.
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