Unraveling earnings management: A comprehensive analysis of loan loss provisions under IFRS 9 and the influence of executive remuneration

Sammanfattning: This study examines what impact the change from the Incurred Loss (IL) model under IAS 39 to the Expected Credit Loss (ECL) model under IFRS 9 had on earnings management through loan loss provisions (LLP). By studying a sample of listed European banks, our findings suggest that CEOs manage earnings through LLP but with different loss recognition practices under the two accounting regimes, recognizing fewer LLP under IAS 39 and more under IFRS 9. This study builds upon previous research by showing that when it comes to earnings management through LLP, CEOs do not perceive there to be a one size fits all solution to increase share price. Moreover, the study finds support that banks smooth income to a greater extent under IFRS 9 than under IAS 39, but only for banks whose CEOs are highly incentivized by increases in share price. This implies that executive remuneration plays a crucial role in determining the extent to which earnings management through LLP is used. Our study contributes to the existing literature on accounting standards and earnings management by highlighting the influence of executive remuneration and discretion on accounting decisions. Despite the lack of robustness, our findings have implications for both regulators and investors, emphasizing the need for a better understanding of the impact of IFRS 9 and its consequences.