Determinants of Signaling by Banks through Loan Loss Provisions

Posted: 4 Aug 2004

See all articles by Kiridaran (Giri) Kanagaretnam

Kiridaran (Giri) Kanagaretnam

York University - Schulich School of Business

Dong-Hoon Yang

Information and Communications University (ICU)

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Abstract

This study investigates whether bank managers use their discretion in estimating loan loss provisions to convey information about their banks' future prospects. Bank managers' propensities to signal their private information vary cross-sectionally because they face different conditions and have different incentives. This study hypothesizes that the propensity to signal varies negatively with bank size and positively with earnings variability, future investment opportunities, and degree of income smoothing. The empirical evidence supports these predictions. It suggests that the propensity to signal is positively related to the degree of information asymmetry and that bank managers attenuate perceived undervaluation of their banks by communicating their private information about their banks favorable future prospects.

Keywords: Signaling, Loan Loss Provision, Earnings Variability, Investment Opportunity Set, Income Smoothing

JEL Classification: C23, G14, G34, J41, M41, M43

Suggested Citation

Kanagaretnam, Kiridaran and Yang, Dong-Hoon and Lobo, Gerald J., Determinants of Signaling by Banks through Loan Loss Provisions. Available at SSRN: https://ssrn.com/abstract=559194

Kiridaran Kanagaretnam

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Dong-Hoon Yang

Information and Communications University (ICU) ( email )

119 Munjiro
Yusong, Daejon, 305-600
Korea
82-42-866-6316 (Phone)
82-42-866-6340 (Fax)

Gerald J. Lobo (Contact Author)

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

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