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the Nature of information in commercial bank loan loss disclosures
Commercial bank loan portfolios are typically 10 to 15 times larger than bank equity; therefore bank loan portfolio cash flows and default risks are likely to have an important impact on bank stock market values. Bank financial statements provide three separate disclosures of changing default risks: non-performing loans, loan loss provisions, and loan chargeoffs. This study analyzes each of these disclosures for information about future bank cash flows and examines how investors impound this information in bank stock prices. Non-performing loans include all loans in the portfolio more than 90 days overdue on interest or principal payments, and are disclosed as supplemental financial statement information. Loan loss provisions reflect the current period increase in the level of expected future loan losses, and are disclosed as accrued expenses on the income statement. Loan chargeoffs measure all loans deemed uncollectible during the period. Chargeoffs are asset writeoffs that are reported separately in financial statement footnotes, and can also be derived from balance sheet and income statement data. Together these three disclosures represent an integrated, contextual set of potentially value-relevant information spanning the income statement, balance sheet, and footnotes. Recent empirical studies obtain evidence consistent with a positive relation between stock returns and loan loss provisions (cf., Beaver et al. 1989; Elliott et al. 1991; Griffin and Wallach 1991; Johnson 1989). This evidence is surprising because it contradicts the notion that loan loss provisions are interpreted as expenses that reflect expected future loan losses. These papers conjecture that perhaps the market interprets provisions as revelations of bank managers' private information about expected future earnings, but do not test this idea. One potential explanation for these findings is that investors condition their interpretation of unexpected provisions on contemporaneous unexpected changes in non-performing loans and unexpected loan chargeoffs. These relatively non-discretionary pieces of loan loss information may enable investors to estimate discretionary components in unexpected loan loss provisions. If investors observe discretion being exercised over reported provisions, then they can make inferences about managers' private information. The conjecture of prior research is that investors infer that managers reveal "good news" when they exercise discretion to increase provisions. The evidence presented here suggests bank managers increase the discretionary component of unexpected loan loss provisions when future cash flow prospects improve. Specifically, unexpected provisions are positively related to future changes in cash flows, after controlling for current changes in cash flows, unexpected changes in non-performing loans, and unexpected loan chargeoffs. Annual unexpected provisions are positively related to future changes in cash flows as far as three years ahead. Contemporaneous annual (and quarterly) stock returns, as well as earnings announcement date stock price reactions, confirm that investors interpret discretionary components of unexpected provisions as "good news." These findings contribute new evidence on earnings management and its impact on the capital markets. The positive relations between unexpected provisions and both returns and future cash flows emerge only when unexpected provisions are conditioned on unexpected changes in non-performing loans and unexpected loan chargeoffs. These results suggest unexpected changes in non-performing loans and unexpected loan chargeoffs, both of which are negatively related to changes in future cash flows and current stock returns, and enable investors to observe discretionary components of unexpected provisions. These findings provide new evidence of a context in which the market's interpretation of a component of income is conditioned on related disclosures found on the balance sheet and in the financial statement footnotes.
Ketersediaan
| Call Number | Location | Available |
|---|---|---|
| AR6903 | PSB lt.dasar - Pascasarjana | 1 |
| Penerbit | USA: American Accounting Association 1994 |
|---|---|
| Edisi | Vol. 69, No. 3, Jul., 1994 |
| Subjek | Commercial banks Market valuation Non-Performing Loans (NPL) Loan Loss Provisions (LLP) Loan Chargeoffs (LCO) financial disclosures |
| ISBN/ISSN | 00014826 |
| Klasifikasi | NONE |
| Deskripsi Fisik | 24 p. |
| Info Detail Spesifik | The Accounting Review |
| Other Version/Related | Tidak tersedia versi lain |
| Lampiran Berkas |