Earnings and capital management by latin american banks with financial instruments

Purpose: The objective of the study was to assess whether banks in Latin America use unrealized gains and losses with financial instruments, recorded as other comprehensive income, with the objective of earnings management and regulatory capital. Methodology: Using data from 75 banks in 13 countries in Latin America, from 2008 to the first quarter of 2020, the empirical tests comprised the estimation of a panel data model with sectional fixed effects, following Barth et al. (2017). Results: The estimates made revealed that there is no empirical evidence that these banks, in general, use unrealized gains and losses with financial instruments for earnings management purposes. On the other hand, the empirical results show that banks with lower capital ratios (lowest quintile) use these profit and loss shares with the financial instruments DPV or VJORA as both a capital and earnings management mechanism. Contributions of the Study: The study contributes to the advancement of the accounting literature, by evaluating the use of the earnings and capital management approach through operational activities - in the case of capital management, through the reduction of riskweighted assets (RWA).