This analysis finds earnings management declined post-2016 EU reforms in banks, indicating governance and regulation's significant roles.
This study investigates earnings management in European banks in the context of the 2016 EU audit directive. Using a dynamic panel of 134 banks over 2012–2023, we apply two‐step System‐GMM estimators with three profitability measures—Earnings Before Provisions and Taxes (EBPT), Return on Assets (ROA), and Return on Equity (ROE). The results show that earnings management was persistent before the directive but declined markedly thereafter. Profitability constrained manipulation in the pre‐directive period, but its influence largely disappeared as regulation emerged as the dominant disciplining force—except for EBPT, which gained importance after 2016. Capitalization reduced manipulation before the directive but lost significance afterward, while economic growth, which previously fuelled manipulation, was fully neutralised. Governance effects also shifted: institutional quality alone did not reduce manipulation, but the directive enhanced its effectiveness, whereas governance divergence showed weaker and less stable effects. These findings advance scholarly understanding of how regulation and governance interact to shape earnings management and highlight practical implications for policymakers, regulators, auditors and bank managers.
No takes yet. Share an insight, caveat, or question.
Christofidou et al. (2025) studied this question.
Synapse has enriched 5 closely related papers on similar clinical questions. Consider them for comparative context: