Striving towards the mean? Income smoothing dynamics in small Polish banks
Striving towards the mean? Income smoothing dynamics in small Polish banks

Summary/Abstract: We study the dynamics of the income smoothing process in a large sample of Polish cooperative banks between 2007 and 2012, using fixed effects panel data models. Our analysis indicates that cooperative banks use average sector profitability as a bench-mark, despite the lack of market valuation pressure. The detected earnings management process is asymmetric, depending on being above or below peer performance. Income smoothing allows banks to adjust their earnings when their performance has been much lower than average sector results. This brings their profitability in line with their peers’ mean ROA. In addition, the weakest banks are more prone to perform income smoothing than average and high profit makers. On the other hand, banks that are significantly above average profitability smooth income in a much more restrictive way than their peers. High earners do not understate their earnings and do not create higher loan loss provisions, even if they can afford to make sizeable reserves.

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