Organizational Culture, Competition and Bank Loan Loss Provisions
51 Pages Posted: 11 Oct 2021 Last revised: 31 Jan 2022
Date Written: January 17, 2022
This paper investigates how banks with different organizational cultures (defined as either control-dominant, collaborate-dominant, compete-dominant, create-dominant) manage their loan loss provisions (LLPs) in response to intensified industry competition. For identification, we utilise the change in state level competition that followed the passage of the US Interstate Banking and Branching Efficiency Act (IBBEA) of 1994 as a quasi-natural experiment. We find that banks with a collaborate-dominant organizational culture are less likely to exercise discretion over LLPs. In contrast, banks with compete- and create-dominant organizational cultures have higher discretionary LLPs when competition increases. Moreover, banks use discretionary LLPs to smooth income and signal private information to outsiders. This varies with organizational culture. Specifically, banks with collaborate-dominant organizational cultures exhibit less income smoothing, while counterparts with create-dominant use discretionary LLPs as an information signalling device to outside stakeholders. Finally, banks with a create-dominant organizational culture are more likely to be subject to formal regulatory enforcement actions.
Keywords: Bank deregulation, Organizational culture, Competition, Discretionary loan loss provisions, Textual analysis
JEL Classification: G20, G21, G28, M14, M41
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