Joint Tests of Signaling and Income Smoothing Through Bank Loan Loss Provisions

48 Pages Posted: 26 Dec 2000

See all articles by Kiridaran (Giri) Kanagaretnam

Kiridaran (Giri) Kanagaretnam

York University - Schulich School of Business

Dong-Hoon Yang

Information and Communications University (ICU)

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Date Written: November 2000

Abstract

This study investigates the implications of bank managers' discretion over their loan loss provision. It empirically assesses whether discretionary loan loss provision contains both signaling and income smoothing components. To do so, the study identifies different environments in which either signaling or income smoothing or both motivations exist. The results indicate that relative undervaluation plays a critical role in motivating bank managers to use discretionary loan loss provision to signal their private information about future bank performance. The analysis also demonstrates that the level of current performance relative to the industry median is a key determinant of managers' decisions to smooth income.

Keywords: Loan loss provisions, signaling, income smoothing, joint tests

JEL Classification: C23, G14, M41, M43, J41

Suggested Citation

Kanagaretnam, Kiridaran and Yang, Dong-Hoon and Lobo, Gerald J., Joint Tests of Signaling and Income Smoothing Through Bank Loan Loss Provisions (November 2000). Available at SSRN: https://ssrn.com/abstract=253902 or http://dx.doi.org/10.2139/ssrn.253902

Kiridaran Kanagaretnam

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Dong-Hoon Yang

Information and Communications University (ICU) ( email )

119 Munjiro
Yusong, Daejon, 305-600
Korea
82-42-866-6316 (Phone)
82-42-866-6340 (Fax)

Gerald J. Lobo (Contact Author)

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

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