Managerial incentives and accounting quality: the role of ownership in banking

Abstract

Purpose

The study investigates the influence of managerial discretion over accruals on banks' financial reporting quality. Furthermore, it examines the role of ownership in shaping managerial incentives to manipulate banks’ reporting quality in a developing economy.

Design/methodology/approach

The sample includes 37 Indian public- and private-sector banks from the fiscal year 2001–2022. The discretionary LLP (DLLP) is used to examine various managerial incentives and accounting quality. The models are estimated using panel fixed-effect regression and the system generalized method of moments. The results survive several sensitivity checks.

Findings

The results exhibit a low quality of financial reporting in public-sector banks, which is evident through the higher use of DLLP for income smoothing and signaling. In contrast, the low-capitalized private-sector banks employ DLLP to manage capital.

Research limitations/implications

The study’s sample size is relatively small and focuses on a single country. Future researchers can investigate other emerging economies to better generalize the findings of this study.

Practical implications

The study highlights the influential role of ownership in shaping managerial incentives in the banking industry. Moreover, the study is of utmost importance for governments, regulators and policymakers in devising policies that reduce agency conflicts and improve financial stability in emerging economies.

Originality/value

The study subscribes to the growing literature on the role of ownership in influencing the banks’ financial reporting quality. To the best of the author’s knowledge, this is one of the limited studies in the context of government-owned vs private-owned banks in an emerging economy.

Citation

Gupta, M. (2024), "Managerial incentives and accounting quality: the role of ownership in banking", Journal of Applied Accounting Research, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JAAR-06-2023-0175