Abstract
Recent research has shown that discretionary loan loss provisions are positively associated with bank stock returns and future earnings. The good news signaled by discretionary provisions is most prominent for banks with greater incentive to signal good news (e.g., low-regulatory-capital banks with potential loan default problems); for banks with greater degrees of accounting discretion over the loan loss provision (e.g., banks with portfolios with a high proportion of commercial loans); and for provisions in the fourth quarter, which is audited. Banks with low regulatory capital that record large fourth-quarter loan loss provisions adopt more-conservative future loan growth strategies and generate substantial improvement in future earnings. These results suggest that bank managers increase discretionary provisions to signal “good news” about future earnings and that increased discretionary provisions are associated with other, less observable management actions that increase the value of the bank.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
