Differential Valuation Implications of Loan Loss Provisions Across Banks and Fiscal Quarters
THE ACCOUNTING REVIEW, Vol 72, No 1, January 1997
Posted: 29 Apr 1998
Prior research has found that loan loss provisions are positively associated with bank stock returns and future cash flows, conditional on less discretionary information about loan default. We find that these positive valuation implications obtain only for loan loss provisions for low regulatory capital banks in the fourth fiscal quarter. Our regulatory capital-based tests are motivated by the idea that increased discretionary loan loss provisions are plausibly good news only for banks which appear to have loan default risk problems based on prior information. Our fiscal quarter tests are motivated by findings in prior literature that suggest that managers have incentives to delay income decreasing accruals until the fourth quarter when the audit occurs, implying that income decreasing accruals are more likely and therefore more expected in the fourth quarter than in other fiscal quarters (Mendenhall and Nichols, 1988 and Boyd, et al., 1994).
JEL Classification: M41, C21, G12
Suggested Citation: Suggested Citation