IFRS 9 and procyclicality of loan loss provision among Chinese local banks: the role of local leaders' turnover, earnings management, and legal enforcement

Abstract

This research investigates the impact of IFRS 9 adoption on procyclicality while considering the role of local leader turnover, earnings management, and legal enforcement. However, prior studies mainly focus on the impact of IFRS 9 on banks' performance. Further, the research on the broader impact of IFRS 9 on the economy is relatively limited. Prior studies also failed to consider the interaction between institutional setting and IFRS 9. China’s diverse local institutional settings and numerous local banks provide a unique opportunity to study the procyclicality in relation to local economic cycles. This diversity also allows for investigating how institutional factors influence the relationship between IFRS 9 adoption and procyclicality. Analysing balanced panel data of 174 Chinese local commercial banks from 2019 to 2022, this thesis finds that IFRS 9 adoption mitigates procyclicality, supporting financial accelerator theory. Additionally, the findings reveal that local leader turnover hinders IFRS 9’s countercyclical effect, which aligns with the financial accelerator theory. Further, the findings show that IFRS 9 adoption mitigates procyclicality by constraining earnings management, which aligns with the agency theory. Moreover, the findings indicate that legal enforcement further strengthens IFRS 9’s restriction on earnings management and contributes to mitigating procyclicality, which aligns with institutional theory. Theoretically, this thesis extends the literature on the economic effect of IFRS 9 by investigating its impact on procyclicality. Incorporating the financial accelerator, institutional, and agency theories into accounting practices enhances their applicability and contributes to a deeper understanding of their relevance in accounting. Practically, this thesis contributes to understanding the political and legal enforcement’s role in IFRS 9 adoption. It provides empirical evidence of IFRS 9’s economic effects to the standard setters and policymakers, facilitating the improvement of the accounting standard and the corresponding policies. Methodologically, this thesis revealed that earnings management is a moderator to the relationship between IFRS 9 and procyclicality, contributing to the knowledge of the additional implications of earnings management on procyclicality. Future research may explore the transitional period from IAS 39 to IFRS 9, focusing on changes in loan loss provisions (LLP) and potential distortions or adjustments during this phase.