| dc.description.abstract | In this study, a random sample consisting of 491 corporate loan customers for the period between June 1984 and March 2004 was selected. The Bank has approximately 12,000 corporate loan customers in total. The information collected included valid samples of the credit application forms, reports of credit evaluations on the loan applicants, the corporate customers’ credit limit balance obtained from the Joint Financial Information Center, the corporate customers’ audited Balance Sheets, Statements of Income and Statements of Cash Flows, reports of investigation on new overdue loans and records of credit collections.
The t-test and Singed Rank test were used to examine whether the loan applicants have engaged in any act of earnings manipulation under different analytical perspectives. The t-test examined that between normal corporate borrowers and problem corporate borrowers, whether the average value of discretionary operating and non-operating events pertaining to bank credit risk management decisions differed significantly. In addition, the Wilcoxon Rank test was used to examine whether the medium of the two variables differed significantly. The t-test and Wilcoxon Rank Sum (also called the Chi-Square test) were used to analyze that between normal corporate borrowers and problem corporate borrowers, whether the various variables display significant variances.
A modified Jones Model was used to evaluate the tools used for earnings manipulation. The regression models- Logit Model and OLS Model- were used for empirical validation. Variables were selected using the “Backward Stepwise Method” in statistical study with the aim of establishing a concise model that carries significant explanatory power. The first step of the “Backward Stepwise Method” involves feeding of all variables into the model, of which their individual significance is then examined. Variables are excluded from the model according to their order of significance, that is, the least significant variable is excluded first. This study sets the variable selection criteria as follows: any variable with a significance level less than or equal to 0.1 is incorporated into the model and those that are over the limit are excluded.
We conducted an overall earnings manipulation analysis on the entire sample of credit applications to establish whether any corporate borrower has engaged in earnings manipulation prior to its credit application. We found that some corporate customers utilized discretionary operating and non-operating events to manipulate their earnings when applying for loan. Further analysis on the act of earnings manipulation of normal corporate borrowers and problem corporate borrowers revealed that corporate customers with normal operating practices would often attempt to manipulate earnings by using discretionary operating accounts as a tool to obtain more favorable credit terms. We took one step further and analyzed corporate borrowers’ earnings manipulation behavior prior to lodging their credit application from the perspective of the industry to which they belong. We found that for corporate customers either from the traditional manufacturing industry or the electronics & information technology industry, in order to successfully obtain the bank loan or favorable financing terms, they would manipulate their earnings by using discretionary operating accounts. At last, we analyzed corporate borrowers’ earnings manipulation behavior based on the scale of operation and found that large or small companies would attempt to manipulate their earnings to obtain the bank loan or more favorable financing terms.
To compare whether the discretionary operating and non-operating items of a normal corporate borrower and a problem corporate borrower differ significantly, we first took the tools for earnings manipulation as the perspectives for the analysis. It was found that problem corporate borrowers act significantly differently from normal corporate borrowers prior to allowing the loans becoming overdue in that problem corporate borrowers have the motive of using discretionary non-operating accounts as the tools for earnings manipulation. Further, by comparing the industry to which the corporate borrowers belong, we found that problem corporate borrowers in the traditional manufacturing industry act significantly differently from normal corporate borrowers prior to allowing the loans becoming overdue in that they tend to use discretionary operating accounts as the tools for earnings manipulation. Problem corporate borrowers in the traditional manufacturing industry, electronics & IT industry or construction industry were found to act significantly differently from normal corporate borrowers prior to allowing the loans becoming overdue in that they tend to utilize discretionary non-operating tools to manipulate their earnings. On examining the issue from the scale-of-operation perspective, medium and small problem corporate borrowers act significantly differently from normal corporate borrowers prior to allowing the loans becoming overdue in that they tend to utilize discretionary operating tools to manipulate their earnings. Irrespective of the scale of operation, problem corporate borrowers act significantly differently from normal corporate borrowers in that they have the motive of using discretionary non-operating accounts to manipulate their earnings prior to allowing the loans becoming overdue.
In general, corporate surveillance and governance variables of a corporate borrower that may significantly influence the earnings manipulation behavior of normal corporate borrowers and problem corporate borrowers include: “Accounting Information Quality Index”, “Management Guarantee Effectiveness Index” and “Information Gap Index”. Financial information variables of a corporate borrower that may significantly influence the earnings manipulation behavior of normal corporate borrowers and problem corporate borrowers include: “Group Corporate Loans As a Percentage of the Bank’s Net Worth”, “Accumulated Deficit Index”, “Total Credit Limit of Financial Institution Loans As a Percentage of Total Liabilities” and “Total Balance of Financial Institution Loans As a Percentage of Operating Revenue”. Credit policy related variables that may significantly influence the earnings manipulation behavior of normal corporate borrowers and problem corporate borrowers include: “Accounts Receivable Turnover” and “Inventory Turnover”. Credit-worthiness related variables that may significantly influence the earnings manipulation behavior of normal corporate borrowers and problem corporate borrowers include: “Credit History Index”, “Whether collateral has been provided” and “Credit Rating of the Borrower”. | en_US |