Abstract
In this study, I provide a forward looking approach for assessing the loan portfolio quality of commercial banks. I first develop an accrual reliability categorization for financial institutions and show that existing findings for non-financial firms extend to financial firms. I next demonstrate how supplementing the information in accruals leads to significantly improved assessment of accrual quality. Focusing on commercial banks’ loan portfolios, I supplement information in accruals with footnote disclosures regarding loan portfolio concentrations and regional economic indicators. I show that the resulting loan portfolio quality index (PQI) further isolates less reliable accruals and significantly improves the forecasting of future earnings and stock returns.
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