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Hedge fund activism and loan loss provisioning in U.S. banks

Author

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  • Holod, Dmytro
  • Kitsul, Yuriy
  • Torna, Gӧkhan

Abstract

In this study, we explore the hedge fund activist (HFA) influence on managerial decisions in the opaque banking industry. Focusing on loan loss provisions (LLPs), an accounting item that is subject to considerable managerial discretion as well as scrutiny from various regulatory agencies, we find that HFAs alleviate the agency problems associated with bank loan loss provisioning decisions. The findings show that HFA influence leads to a substantial reduction in overstatements, but not understatements, of LLPs at target banks. This results in a prompt increase in bottom-line profitability and stock returns, while pointing to no appreciable change in bank risk. We conclude that the disciplinary effect of HFAs contributes to shareholder value by leading to a reduction in excessive loan loss provisioning consistent with a realignment of LLP decisions with target bank shareholders’ interests.

Suggested Citation

  • Holod, Dmytro & Kitsul, Yuriy & Torna, Gӧkhan, 2025. "Hedge fund activism and loan loss provisioning in U.S. banks," Journal of Banking & Finance, Elsevier, vol. 178(C).
    • Handle: RePEc:eee:jbfina:v:178:y:2025:i:c:s0378426625001396
    DOI: 10.1016/j.jbankfin.2025.107519
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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