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

See all articles by Chi-Chun Liu

Chi-Chun Liu

National Chengchi University

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business

James Michael Wahlen

Indiana University - Kelley School of Business - Department of Accounting

Abstract

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

Liu, Chi-Chun and Ryan, Stephen G. and Wahlen, James Michael, Differential Valuation Implications of Loan Loss Provisions Across Banks and Fiscal Quarters. THE ACCOUNTING REVIEW, Vol 72, No 1, January 1997, Available at SSRN: https://ssrn.com/abstract=2713

Chi-Chun Liu

National Chengchi University

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei 11623
Taiwan

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street, Suite 10-73
New York, NY 10012-1118
United States
212-998-0020 (Phone)

James Michael Wahlen (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2658 (Phone)
812-855-8679 (Fax)

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