Profit Status of Microfinance Institutions and Incentives for Earnings Management

• In Event: Accounting

Abstract

We theorize that for-profit microfinance institutions (MFIs) tend to have higher incentives to use earnings management techniques when compared to their not-for-profit counterparts. We show empirically that, when facing a distress period, for-profit MFIs recognize more impairment losses provisions then not-for-profit ones in about 0.8% of its assets. This is consistent with the idea that those institutions are using “big bath” accounting practices. We also address a possible alternative explanation, since we present evidence that distress levels do not differently affect the ability of loan repayment depending on the profit status of the MFI. Finally, using the 2008 crisis as an exogenous shock and country-level recessions as an instrumental variable, we replicate our results.

Authors

• Rodrigo Leite, Rio de Janeiro State University

• Layla Mendes, Brazilian School of Public and Business Administration

• Rafael de Lacerda Moreira, Brazilian School of Public and Business Management of Getulio Vargas Foundation