Asset quality, earnings management and bank stability under IFRS 9: a cross-country examination

Purpose This study examines the impact of IFRS 9 adoption on bank stability in Africa, with a special focus on the role asset and earnings quality play on bank stability following its adoption in 2018. Design/methodology/approach The study utilises panel data drawn from 554 banks in 43 African countries over the period 2014–2021. Various econometric analyses are performed using two-sample tests and two-step GMM regression for data comprising 3,510 firm-year observations. Findings The findings, which are robust for endogeneity and the adverse effects of COVID-19 pandemic on bank stability, reveal potential cross-country heterogeneity relating to the effects of IFRS 9 adoption, asset and earnings quality on bank stability. There seems to be a limited influence of IFRS 9 adoption on the stability of banks in Africa. The results reveal that declines in asset quality negatively impact bank stability, while improved earnings quality is effective in promoting bank stability. Increases in nonperforming loans are associated with increased bank risk, which is cushioned through improved earnings quality following IFRS 9 adoption, thereby boosting bank stability. Research limitations/implications The study argues that since the IFRS 9 adoption was more of a conciliator between the interests of both bank regulators and accounting enforcement agencies, the adoption of the standard is likely to contribute to a relatively stronger financial services sector, especially in developing economies. The study cautions regulators not to employ a “straight-jacket” approach in implementing the standard and its consequent pronouncements. Practical implications The study is useful in informing accounting regulators, bank managers, auditors and financial reporting managers of banks as to the implications of IFRS 9 adoption. Originality/value This is perhaps one of the few studies to examine a large dataset illustrating the implications of the mandatory adoption of IFRS 9 in developing and emerging economies.