Please use this identifier to cite or link to this item:
On the Signaling Incentives of Loan Loss Provision Recognized by Banks
Signaling equilibrium;Discretionary loan loss provision;Regulatory costs
|Issue Date:||2017-11-15 14:54:13 (UTC+8)|
Several recent papers have found that the market reacted favorab1y to banks' loan loss provision announcements and have invoked signaling interpretation for the results. These studies did not, however, explicitly discuss important questions such as: (a) why the loan loss provision can serve as a credible signal and (b) what are the conditions under which a signaling equilibrium can be maintained. Assuming that the loan loss provision consists of a discretionary and a non-discretionary component, this paper develops a model in which managers use the discretionary loan loss provision as a signal to resolve information asymmetry between banking firms and the capital market. It is shown that a fully separating signaling equilibrium exists if two conditions hold: (a) regulatory costs which result from the capital adequacy ratio regulations are increasing in the level ofthe discretionary loan loss provision; and (b) expected future cash flows of the bank cannot be revealed with certainty by information other than the discretionary loan loss provision. The signaling model predicts that the discretionary loan loss provision is increasing in the levels of the expected future cash flows, the equity-to-asset ratio, the amount ofunrealized security gains, and the probability that the expected future cash flows can be revealed by information other than the discretionary loan loss provision.
|Relation:||會計評論, 29, 223-255|
|Appears in Collections:||[會計評論] 期刊論文|
Files in This Item:
All items in 學術集成 are protected by copyright, with all rights reserved.