Managerial entrenchment, external discipline and accounting manipulations in the credit union industry

This study examines the extended stakeholder corporate governance model in credit unions and the extent to which inherent managerial entrenchment impacts upon their operational decisions. Using Australian credit union data and the introduction of Basle-type capital adequacy regulations as a case study, we demonstrate that credit union management will opt to manage capital adequacy ratios through the application of accounting manipulations instead of applying policies that increase operating margins. In particular, credit unions with capital adequacy ratios below the Cooke Ratio of 8% will undertake risky accounting reclassifications. Our results support the view that regulators
should consider the heterogeneity of financial institutions before imposing (possibly) inappropriate template regulation with a one-shoe-fits-all regulation.

JEL Classification: G21, M40
Keywords: Extended Stakeholder Corporate Governance; Credit Unions; Regulatory-Capital
Arbitrage; Accounting Manipulations.