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Discretion in bank loan loss allowance, risk taking and earnings management

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Listed:
  • Justin Jin
  • Kiridaran Kanagaretnam
  • Gerald J. Lobo

Abstract

We study whether banks use the allowance for loan losses (ALL) for efficiency or for opportunistic reasons. We find that banks that had higher abnormal ALL during the period prior to the 2007–2009 crisis engaged in less risk taking during the pre‐crisis period and had a lower probability of failure during the crisis period. In testing earnings management to meet or beat earnings benchmarks, we find that abnormal ALL is unrelated to next period's loss avoidance and just meeting or beating the prior year's earnings. Our results suggest that banks use ALL for efficiency and not for opportunistic purposes.

Suggested Citation

  • Justin Jin & Kiridaran Kanagaretnam & Gerald J. Lobo, 2018. "Discretion in bank loan loss allowance, risk taking and earnings management," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(1), pages 171-193, March.
    • Handle: RePEc:bla:acctfi:v:58:y:2018:i:1:p:171-193
    DOI: 10.1111/acfi.12210
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    References listed on IDEAS

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