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

Discretionary behavior with respect to allowances for loan losses and the behavior of security... The study examines the capital market pricing of discretionary and nondiscretionary components of a major accrual in the banking industry, the allowance for loan losses. The analysis employs a two-stage approach in which the allowance account is first decomposed into estimates of its nondiscretionary and discretionary components. The second stage evaluates the market's valuation of the estimates of the components. Evidence suggests that the capital market perceives the allowance to be comprised of two components, a nondiscretionary component which is negatively priced and a discretionary component whose incremental pricing coefficient is positive. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting and Economics Elsevier

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

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Publisher
Elsevier
Copyright
Copyright © 1996 Elsevier Ltd
ISSN
0165-4101
D.O.I.
10.1016/S0165-4101(96)00428-4
Publisher site
See Article on Publisher Site

Abstract

The study examines the capital market pricing of discretionary and nondiscretionary components of a major accrual in the banking industry, the allowance for loan losses. The analysis employs a two-stage approach in which the allowance account is first decomposed into estimates of its nondiscretionary and discretionary components. The second stage evaluates the market's valuation of the estimates of the components. Evidence suggests that the capital market perceives the allowance to be comprised of two components, a nondiscretionary component which is negatively priced and a discretionary component whose incremental pricing coefficient is positive.

Journal

Journal of Accounting and EconomicsElsevier

Published: Aug 1, 1996

References

  • Stakeholders' implicit claims and accounting method choice
    Bowen, R.; DuCharme, L.; Shores, D.
  • Valuation and clean surplus accounting for operating and financial activities
    Feltham, G.; Ohlson, J.

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