Earning opacity and Bank stability: Evidence from the Iraqi Banking Sector

Abstract

This study aims to investigate the impact of earnings opacity on banking stability in the
Iraq Stock Exchange. The extent that earnings opacity exists is measured by the discretionary
portion of loan loss provisions, and bank stability is captured through the Z-score as an overall
measure for probability of financial distress. By employing panel data regression models with
several control variables, we find that earnings opacity has a positive and significant effect on
bank stability. This result implies that the use of accounting flexibility can serve as a risk?taking
instrument in less informationally efficient and more institutionally unstable banking markets.
The findings also support the positive and significant impact of profitability on improving bank
stability. This paper contributes to the available literature as we empirically demonstrate, using
evidence from an emerging market, that the effect of earnings opacity on stability varies
significantly with institution-specific and country-specific conditions.