We examine whether and how managers use loan loss provisions to smooth income and to signal their private information about their banks' future prospects. Our paper highlights that the use of the loan loss provision to accomplish more than one objective gives rise to situation‐specific costs and benefits of manipulating the provision up or down. We hypothesize that relatively undervalued banks have greater incentives to signal their future prospects than fairly valued banks and that banks' incentives to smooth intensify as premanaged earnings deviate from norms. On the basis of these conjectures, we categorize sample banks into subgroups that are predicted to use loan loss provisions consistent with their situation‐specific incentives. This allows us to refine the research methods used in prior research to examine heterogeneous incentives. While we find evidence consistent with the use of loan loss provisions to smooth earnings, particularly when premanaged earnings are extreme, our evidence on signaling is less consistent. In particular, our signaling results depend on the introduction of an interaction term that has not been used in prior research. We also document that the intensity of smoothing (signaling) is not uniform across the sample. In addition to being a function of the incentive to smooth (signal), it also is a function of the incentive to signal (smooth).
Contemporary Accounting Research – Wiley
Published: Dec 1, 2004
It’s your single place to instantly
discover and read the research
that matters to you.
Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.
All for just $49/month
Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly
Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.
Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.
Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.
All the latest content is available, no embargo periods.
“Hi guys, I cannot tell you how much I love this resource. Incredible. I really believe you've hit the nail on the head with this site in regards to solving the research-purchase issue.”Daniel C.
“Whoa! It’s like Spotify but for academic articles.”@Phil_Robichaud
“I must say, @deepdyve is a fabulous solution to the independent researcher's problem of #access to #information.”@deepthiw
“My last article couldn't be possible without the platform @deepdyve that makes journal papers cheaper.”@JoseServera