Abstract

This dissertation is comprised of three essays on issues related to the financial reporting practices of credit unions in the United States. The first essay relies on an agency theory perspective to examine the extent of earnings management in U.S. credit unions through loan loss provisions (LLP). The context of member-owned credit unions provides a different set of financial reporting incentives than the one typically found in shareholder-owned banks, thus providing an opportunity to extend earnings management research. The sample comprises U.S. credit unions above $50 million in total assets, between 2003 and 2016. Results show that credit union managers engage in income smoothing through the discretionary use of LLP to avoid earnings declines. Results also show that larger and better-capitalized credit unions engage in more earnings management, as do credit unions with a federal charter. Moreover, credit unions are driven by the incentive of merging to engage in earnings management. The findings are economically significant, and thus, relevant to policymakers contemplating new regulations since these managerial activities may place the cooperative principle at risk.
The second essay examines how competition affects risk-taking of a matched sample (by size and county) of banks and credit unions, and whether it affects differently credit unions and banks. Several measures of risk-taking are used in the study. The period of the study is from 2010 till 2017. First, univariate analyses are conducted to compare the risk-taking of the two types of institutions. We find that the means of the risk-taking measures do not differ significantly between banks and credit unions. Second, examining the difference in the risk-taking of credit unions and banks in a multivariate analysis, we find that banks’ managers engage in riskier activities. Third, we examine the effect of competition on the risk-taking. We find that increased competition induces managers of credit unions and banks to take more risk; this finding supports the competition-fragility hypothesis. We also find that credit unions’ managers take more risk than banks’ managers in the presence of competition. Finally, by including the quadratic term of competition, we find that there is a non-linear relationship between competition and risk-taking. This study has public policy implications: the American Banking Association argues that public policy toward credit unions and banks should be similar due to their similarities; whereas, credit unions express their difference to protect their privilege of tax exemption.
The third essay attempts to identify certain traits of the target credit unions in comparison to acquiring and non-merging credit unions. The analysis is performed both qualitatively and quantitatively. First, the paper presents a clinical analysis of three cases of mergers of credit unions. Each case is analyzed from the perspective of agency theory to determine the reason for merger. The three cases illustrate how the executives and directors are seeking their own utilities at the expense of the members. Second, we aim to identify certain characteristics of target credit unions empirically by comparing a sample of acquired credit unions to a matched sample of non-merging credit unions and the acquiring credit unions. The sample comprises U.S. credit unions above $10 million in total assets that merged to expand their services between 2011 and 2017. We identified a list of ratios that are used by the NCUA for credit union assessment, a univariate analysis of variance tests for differences between the means of these ratios among the three groups (targets, acquiring, and non-merging credit unions); the means of the ratios of the three groups are statistically different. Then, factor analysis is performed to classify the major factors that explain the majority of variance. Growth, capital adequacy, asset quality, and earnings are the major ratios that differentiate between the target, acquiring, and non-merging credit unions. The paper has public policy implications; it provides the NCUA with the necessary information for the amendment of the voluntary mergers proposed rule on May 25, 2017.

Keywords: Earnings management; Credit unions; Loan loss provision; Agency theory; Banks; Risk-taking; Competition; Lerner Index; Mergers; Target; Voluntary merger; Acquisition; Agency hypothesis.