Document Type

Article

Article Version

Post-print

Publication Date

9-2021

Abstract

We provide evidence that discretionary loan loss provisions (DLLP) convey value-relevant information to the market that is highly dependent upon the state of the economy. DLLP is associated with negative abnormal returns during bad economic states characterized by growing default concerns, but it is associated with significantly higher abnormal stock returns in good economic states, as banks relax underwriting standards and look to accelerate loan growth. Exploring the underlying link, we find that banks recording higher provisions during good times realize significantly higher earnings and loan growth in the subsequent year, whereas such banks experience further increases in non-performing loans following periods of distress. These findings are not driven by the 2008 financial crisis when investors responded even more negatively to DLLP. With new accounting standards requiring an even greater degree of subjective judgment, regulators should ensure the informativeness of bank loss reserves is preserved.

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The post-print version has been archived here with permission from the copyright holder under a CC BY-NC-ND license.

Publication Title

Journal of Banking & Finance

Published Citation

Hegde, Shantaram P., and Steven E. Kozlowski. "Discretionary loan loss provisioning and bank stock returns: The Role of economic booms and busts." Journal of Banking & Finance 130 (2021): 106186. https://doi.org/10.1016/j.jbankfin.2021.106186

DOI

10.1016/j.jbankfin.2021.106186

Peer Reviewed

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