The effect of disclosures on earnings management and bank performance an empirical study of the banking sector in Ethiopia

Abstract

The study aims to examine the effect of disclosures on earnings management and bank performance and the simultaneous relationship between financial performance and disclosure. Six years of secondary data was collected from seventeen commercial banks. A quantitative research approach and both descriptive and explanatory research designs were used. Descriptive statistics, Generalized least square (GLS) and Three-stage least square (3SLS) regression models were used as data analysis tools. The analysis result revealed that the average financial and social disclosure level of Ethiopian commercial banks was 64.1% and 50.8% respectively. The GLS regression revealed that profitability, bank size, and board size have a significant positive effect on financial disclosure. On the other side leverage, liquidity, and audit committee independence have significant negative effects on financial disclosure. Further, GLS estimation indicates that social disclosure is positively significantly affected by profitability, whereas, it is negatively significantly affected by liquidity and board independence. Moreover, GLS estimation indicated that earnings management is significantly negatively affected by both financial and social disclosure levels. The 3SLS estimation revealed that both financial disclosure and social disclosure have a significant positive effect on financial performance regardless of the proxies used to measure financial performance. Regarding the simultaneous relationship, the 3SLS result documented a significant mutual association between financial disclosure and all financial performance proxies used. However, social disclosure level has a significant interdependent association only with net interest margin. The result of the study has significance for Bank managers, policymakers, regulatory organizations and future researchers. newline