Earnings management by banks operating in emerging markets - The case of BRICS countries

Abstract

This study was motivated by the intriguing phenomenon of earnings management within commercial banks, particularly in the BRICS nations. The choice of BRICS countries was driven by their significant role in the global economy and their unique challenges regarding regulatory practices and economic structures. The primary objective of this study is to investigate the extent and strategies of earnings manipulation within BRICS commercial banks, shedding light on both its motivation and the factors that drive such behaviour. Utilizing the Beneish Manipulation Score (M-score) model, the study identifies earnings manipulators from non-manipulators. Through the panel regression, the study elucidates the underlying objective of earnings manipulation and the factors influencing such behaviour. The findings reveal that some banks manipulate their earnings, however, this phenomena is observed in less than 30% of the sampled banks. Notably, the identified purposes for such manipulation include income smoothing, capital management, and signaling strategies. Moreover, the findings also highlight the pivotal role Factors such as management compensation, firm size, and profitability act as catalysts for earnings management, while high leverage and superior audit quality serve as deterrents. Despite the growing body of literature on earnings management, there is a noticeable gap in research focusing on BRICS nations. This study addresses this gap and underscores the need for regulatory authorities to re-assess management compensation structures, enforce stricter auditing requirements, and monitor banks’ profitability metrics. It emphasizes the importance of a robust accounting framework and stringent auditing practices for ensuring transparency and accountability in the banking sector of BRICS countries. To our knowledge, this is the first study to examine the extent, strategies, and influencing factors of earnings management within commercial banks in BRICS nations, offering valuable insights for policy formulation.