Impact of bank-to-CBDC disintermediation on accrual and real earnings management: implications for bank earnings quality

Purpose This study explores the effect of bank-to-CBDC disintermediation on bank earnings management and the implications for earnings quality after the issuance of a central bank digital currency (CBDC). Design/methodology/approach The study used the conceptual discourse analysis method to explore the effect of bank-to-CBDC disintermediation on bank earnings management and the implications for earnings quality after CBDC issuance. Findings The CBDC information reported by banks is considered decision-useful and value-relevant only if investors and investor analysts find value in using CBDC in their own economic activities. Bank managers can mitigate the adverse effect of bank-to-CBDC disintermediation on bank earnings by using accounting numbers, such as loan loss provisions (LLPs) and bank deposit rates, to manage their earnings. Accrual-based earnings management is achieved using LLPs. Real earnings management is achieved using the bank deposit rate. The consequence of earnings management is a reduction in earnings quality and financial reporting quality. Research limitations/implications It extends the literature by showing that adverse digital currency financial flows can encourage banks to manage earnings. Practical implications It is recommended that bank supervisors should increase their scrutiny of bank LLPs estimates and limit bank managers' ability to alter the bank deposit rate in response to adverse bank-to-CBDC disintermediation. Originality/value The present study examines how CBDC adoption influences banks to undertake real earnings management using changes in bank deposit rates. This context has not been explored in the earnings management and CBDC literature.