Discretionary behavior with respect to allowances for loan losses and the behavior of security prices

Beaver, William H.; Engel, Ellen

doi:10.1016/s0165-4101(96)00428-4

Cited by 460 publications

(385 citation statements)

References 12 publications

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“…The positive association between returns and IRB banks' DLLPs in the post-Basel II period indicates that Basel II sends a two-fold message to financial market participants. First, DLLPs contain more information regarding future expected losses, which is incorporated into stock prices by the market, consistent with previous literature (such as Wahlen 1994, Beaver & Engel 1996. Second, their lesser reliance on DLLPs for income-smoothing purposes also tells investors that, in times of financial distress, IRB banks are more likely to maintain capital solvency, which is positively valued by investors (Huizinga & Laeven 2012).…”

Section: Introductionsupporting

confidence: 79%

Does Basel II affect the market valuation of discretionary loan loss provisions?

Hamadi

Heinen

Linder

et al. 2016

Journal of Banking & Finance

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We use a sample of banks from 24 European countries to investigate whether the adoption of the Basel II Capital Accord in 2008 affects the market valuation of discretionary loan loss provisions (DLLPs). Although Basel II lowers the incentives of internal ratingsbased (IRB) banks to recognize income-increasing DLLPs in an opportunistic manner, it has no such impact on the remaining banks, which adopt the Standardized methodology. We use this setup in a difference-in-difference (DiD) design, where Standardized banks act as a control group. Our evidence supports the three hypotheses that, for IRB relative to Standardized banks, Basel II is associated with (i) less income-increasing DLLPs and (ii) less income-smoothing via DLLPs, which enhances the informational content of DLLPs about future loan losses and leads to (iii) higher market valuation of DLLPs. Our findings are timely and have policy implications for future regulatory developments in the banking industry.

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Section: Introductionsupporting

confidence: 79%

Does Basel II affect the market valuation of discretionary loan loss provisions?

Hamadi

Heinen

Linder

et al. 2016

Journal of Banking & Finance

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“…information reflected in stock price better than various measures of cash flow and that, on average, managers use their discretion to convey value relevant information to the stock market rather than using it to fool market participants (e.g., Dechow 1994;Subramanyam 1996;Beaver and Engel 1996). These findings are consistent with managers using at least some of their discretion over accounting numbers to signal value relevant information to investors.…”

Section: Book-tax Conformity Evidencesupporting

confidence: 61%

Book-tax conformity and capital structure

2017

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We examine the effect of increased book-tax conformity on corporate capital structure. Prior studies document a decrease in the informativeness of accounting earnings for equity markets resulting from higher book-tax conformity. We argue that the decrease in earnings informativeness impacts equity holders more than debt holders because of the differences in payoff structures between debt and equity investments such that increases in book-tax conformity lead to increases in firms' reliance on debt capital. We exploit a natural experiment in the U.S. and find that firms facing an increase in required book-tax conformity increase leverage relative to other firms. We also provide evidence of an increase in the cost of equity (but not of debt) capital for firms facing an increase in required book-tax conformity relative to control firms and that these increases in cost of equity capital are positively associated with an increase in leverage. Our findings are consistent with firms substituting away from equity and towards more debt in the presence of higher book-tax conformity.

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“…Moreover, they find a positive market reaction to increased loan loss provisions only for banks with relatively larger and more frequently renegotiated loans. Similarly, Beaver and Engel [1996] document a positive incremental pricing coefficient of discretionary component of allowances for loan impairment and find non-discretionary component to be priced negatively by the capital market.…”

Section: Literature Reviewmentioning

confidence: 91%

Value relevance of impairment provisions in the Polish banking sector

Bolibok¹

2015

Prace Naukowe Uniwersytetu Ekonomicznego we Wrocławiu

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Discretionary behavior with respect to allowances for loan losses and the behavior of security prices

Cited by 460 publications

References 12 publications

Does Basel II affect the market valuation of discretionary loan loss provisions?

Does Basel II affect the market valuation of discretionary loan loss provisions?

Book-tax conformity and capital structure

Value relevance of impairment provisions in the Polish banking sector

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