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Earnings management, investors’ trading behaviour, cost of equity capital, and risk-taking: evidence from banks in Asia-Pacific region

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  • Title:
    Earnings management, investors’ trading behaviour, cost of equity capital, and risk-taking: evidence from banks in Asia-Pacific region
  • Author: VO, Nguyen
  • Subjects: Asia-Pacific ; Bank Risk-Taking ; Cost of Equity ; Earnings Management ; Investors' Trading Behaviour
  • Description: The issue of earnings management, a use of accounting techniques to manipulate reported earnings, though widely discussed in the literature, still remains the concern of investors, researchers and policy makers as earnings is a primary source of firm's information. The main thrust of this research is to investigate the impacts of bank earnings management on investors' trading behaviour when investing in bank stocks, banks' cost of equity capital and bank risk-taking behaviour. This study also examines the roles of bank accounting regulations, enforcement regimes, institutional quality and IFRS adoption on the associations between bank earnings management and investors' trading behaviour as well as banks' cost of equity capital. This research focuses on the Asia-Pacific banking sector, the world's largest regional banking market, because banks in this region are facing rising risk and capital cost. In addition, Asia Pacific offers a fruitful context for this research because countries in this region have a diversity of bank regulations, enforcement regimes, institutional environment and IFRS adoption. Using a sample of 250 commercial banks in 13 Asia-Pacific countries and territories over a period of 2002-2017, pooled Ordinary Least Squares, Fixed Effects and System Generalised Method of Moments Models are employed to analyse the data. The study finds that bank earnings management has significant impacts on bid-ask spread, banks' cost of equity and bank risk-taking. The results imply that investors can detect bank earnings management and use this information to obtain profits in stock markets, plus, investors demand compensation when investing in banks where earnings management exists. In addition, earnings management induces bank managers to take on more risk to maintain profitability and compensation. This study also sheds light on the signalling effects of bank accounting regulations, enforcement regimes, institutional quality and IFRS adoption in guiding investors' behaviour and expectation of return in response to bank earnings management. Furthermore, the study extends the 'search for yield' argument to the practices of accounting manipulation as an incentive to take risk of banks. Source: TROVE
  • Creation Date: 2020
  • Language: English
  • Source: Trove Australian Thesis (Full Text Open Access)
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