Abstract

Purpose: The purpose of this study is to provide empirical evidence of the degree to which the business cycle and leverage independently impact discretionary loan loss provisions within Scandinavian banks, and if the business cycle has a moderating effect on the relationship between leverage and discretionary loan loss provisions.

Methodology: This is a longitudinal study that was constructed by a deductive and quantitative research approach. The data gathered is exclusively secondary data, and it is analysed through bivariate analysis, as well as multiple regression analysis.

 Findings: First, our findings indicate an insignificant, positive relationship between the business cycle and discretionary loan loss provisions. Second, our findings indicate a significant, positive relationship between leverage and discretionary loan loss provisions. Third, our findings indicate that the business cycle has an insignificant, negative moderating effect on the relationship between leverage and discretionary loan loss provisions.  

Theoretical perspectives: Positive Accounting Theory and Agency Theory are used as theoretical framework from which predictions and explanations of different earnings management phenomenon are derived.