EARNINGS MANAGEMENT AND LOAN LOSS PROVISIONING IN NIGERIAN DEPOSIT MONEY BANKS

Abstract

This study examined the effect of earnings management incentives on loan loss provisioning in Nigerian deposit money banks listed on the Nigerian Exchange Group over the 2014–2024 period, a timeframe spanning three major macroeconomic disruptions and the transition from IAS 39 to IFRS 9. A quantitative ex post facto design was adopted using balanced panel data from 12 listed banks, yielding 132 bank-year observations. Earnings management incentives were measured through the pre-provision earnings ratio (PPE), and the analysis was conducted using a fixed-effects panel regression model with bank-level clustered robust standard errors, controlling for bank size, post-provision profitability (ROA), and credit risk (NPL). Earnings management incentives had a positive and statistically significant effect on the loan loss provision ratio (β = 0.216, p = 0.002), indicating that Nigerian listed banks with stronger pre-provision earnings recognized higher provisions after controlling for credit risk and other bank characteristics. Non-performing loans were the strongest determinant of provisioning (β = 0.284, p < 0.001), confirming that credit quality remained the primary driver of impairment recognition alongside the discretionary earnings-smoothing motive. Profitability (ROA) was negative but statistically insignificant. The study concludes that loan loss provisioning in listed Nigerian banks serves a dual function, responding legitimately to credit risk while also being shaped by earnings management incentives, consistent with the income-smoothing predictions of Positive Accounting Theory. Prudential regulators should intensify supervisory scrutiny of expected credit loss assumptions during periods of strong pre-provision earnings; audit committees and external auditors should require detailed documentation linking provision changes to concurrent earnings and loan quality; and investors should interpret smooth reported earnings with caution, supplementing headline profit figures with non-performing loan trends and pre-provision earnings disclosures.