Abstract:
In 2011 when Basel III was released, the Chinese Banking Regulatory Committee issued a corresponding regulation, which is Chinese Basel III. It provides new rules for capital adequacy and loan loss provision ratios, and thus may have an impact on earnings management in Chinese banks. This thesis examines earnings management in terms of earnings smoothing, capital management, and signalling incentives in the Chinese banking industry and the impact of Chinese Basel III on these incentives. The thesis also tests whether different types of banks experience divergent impacts from Chinese Basel III. To the best of my knowledge, this is the first study to include regional banks in any analysis of earnings management. Based on a sample of 682 bank-years from 2008 to 2015, this study finds evidence suggesting that earnings smoothing exists in Chinese banks and Chinese Basel III reduces this incentive. There is no difference between national and regional banks in this finding. The results also support the capital management incentive and Chinese Basel III encourages this incentive. In addition, the new regulation has divergent effects on national and regional banks. However, I do not find evidence for the signalling incentive in the period before the issuance of Chinese Basel III. But the signalling incentive is present since Chinese Basel III has been implemented, and there is no difference between the two types of banks. My study indicates that Chinese banks shift their incentives in earnings management since they start to implement Chinese Basel III. Furthermore, there is no difference between city and rural banks, at least in terms of the metrics used in this study. That conclusion challenges the popular belief that small rural banks engage in this behaviour in a more pervasive manner than the large city banks that are subject to more scrutiny.