مدیریت سود بانکی و هموارسازی درآمدها با استفاده از درآمد کمیسیون و دستمزد Bank earnings management and income smoothing using commission and fee income

1. Introduction The question I address is whether European banks use commission and fee income (CF) to manage reported earnings. I focus on two types of earnings management strategy: “income smoothing” and “income-increasing”, and ask a straightforward question: do banks use CF to smooth earnings (so that reported earnings are never too high or too low) or to persistently increase earnings? CF is a component of bank’s non-interest income and one way to test the relationship between non-interest income and bank earnings is to examine the relationship between “earnings before non-interest income” and “one component” of non-interest income. A positive relationship would suggest that banks use that component of non-interest income to increase reported earnings while a negative relationship would suggest that banks use that component of non-interest income to smooth earnings so that earnings are never too high or too low. Accordingly, I draw inference from the statistical relationship between “CF” and “bank earnings before commission and fee income” (EBCF). I focus on CF (a major component of non-interest income) because the literature suggests that CF brings some diversification benefits to banks and also boosts shortfall in bank earnings (DeYoung and Roland, 2001; DeLong, 2001; Stiroh, 2004; Stiroh and Rumble, 2006). This study differs from prior studies because I focus on the relationship between “CF” and “EBCF” – dimensions of bank earnings management that has not been explored in the bank diversification literature. I focus on this relationship to detect whether banks use non-interest income to smooth reported earnings over time or to increase reported earnings. Assuming that banks engage in fee-generating non-depository activities to persistently increase their overall profitability, the analysis in this study aims to provide some insights about whether the increase in bank profit is achieved through income-increasing earnings management. On the other hand, assuming that banks engage in non-depository activities to smooth bank profit over time, I aim to gain some insight about whether persistent bank profitability is achieved through smoothing income over time. The analysis follows prior studies by incorporating “net interest income” (NII) variable into the model used in this study to observe whether there are diversification advantages to be derived from the association between interest income and non-interest income represented as CF.