Bank accounting conservatism and capital management

Purpose The aim of this paper is to investigate if and how conditional conservatism influences capital management practices in the context of European listed banks. Design/methodology/approach We use multiple fixed effects regression models with robust standard errors to test the research hypotheses on a sample of 2,883 bank-year observations for EU-listed banks from 2010 to 2020. Findings The study provides evidence that the adoption of conditional conservatism policies constrains upward capital management. In addition, this study shows that such influence is mediated by two channels: earnings management and loan portfolio quality. Regarding the first channel, this study shows that the adoption of conditional conservatism hinders upward earning management which, in turn, negatively impacts upward capital management, all else being equal. For the second channel, this study shows that the adoption of conditional conservatism improves the quality of the loan portfolio, which hinders upward capital management because of less risky assets in the portfolio. Research limitations/implications This study contributes to banking literature by shedding light on the factors that may favor or obstruct capital management. Practical implications This study can be useful for bank regulators and standard setters to define new regulatory policies and standards that can hinder the use of manipulative accounting practices. Originality/value This is the first study exploring the association between bank accounting conservatism and capital management, thus asking whether some factors like earnings management and loan portfolio quality may act as mediating channels in this relationship.