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Bank Managers' Heterogeneous Decisions on Discretionary Loan Loss Provisions

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  • Lobo, Gerald J
  • Yang, Dong-Hoon
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    Abstract

    This study examines bank managers' three major motivations for discretionary behavior with respect to loan loss provisions: signaling, income smoothing, and capital management. To do so, it utilizes a bank-specific time-series regression approach that captures heterogeneity in the banks' priorities and strategies for alternative motives and compares the results to those from alternative model specifications. The statistical tests and results presented in this study lead to three conclusions. First, significant results for the income smoothing hypothesis are robust to the various model specifications. Second, average signaling coefficients estimated from bank-specific regressions are systematically larger than corresponding coefficients from pooled time-series cross-sectional regressions and are statistically significant. Finally, bank managers appear to use loan loss provisions to manage their regulatory capital levels by comparing them with the minimum ratios specified by regulators rather than with a time-series bank-specific ratio or pooled time-series cross-sectional mean ratio. Copyright 2001 by Kluwer Academic Publishers

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    Bibliographic Info

    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 16 (2001)
    Issue (Month): 3 (May)
    Pages: 223-50

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    Handle: RePEc:kap:rqfnac:v:16:y:2001:i:3:p:223-50

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    Web page: http://springerlink.metapress.com/link.asp?id=102990

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    Cited by:
    1. Marina Balboa & Germán López-Espinosa & Antonio Rubia, 2012. "Non-linear Dynamics in Discretionary Accruals: An Analysis of Bank Loan-Loss Provisions," Faculty Working Papers 06/12, School of Economics and Business Administration, University of Navarra.
    2. Vincent Bouvatier & Laetitia Lepetit, 2006. "Banks' procyclicality behavior : does provisioning matter ?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00115622, HAL.
    3. L. Smith & Baiqiang Jin, 2007. "Modeling exposure to losses on automobile leases," Review of Quantitative Finance and Accounting, Springer, vol. 29(3), pages 241-266, October.

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