IDEAS home Printed from https://ideas.repec.org/a/kap/rqfnac/v20y2003i1p63-80.html
   My bibliography  Save this article

Managerial Incentives for Income Smoothing through Bank Loan Loss Provisions

Author

Listed:
  • Kanagaretnam, Kiridaran
  • Lobo, Gerald J
  • Mathieu, Robert

Abstract

We examine alternative underlying motives of bank managers in using loan loss provisions (LLP) to smooth reported income. Based on the analytical results of Fudenberg and Tirole (1995), we predict that for banks with good (poor) current performance and expected poor (good) future performance, managers will save income for (borrow income from) the future by reducing (increasing) current income through LLP. We also analyze three additional variables that could explain cross-sectional differences in the level of income smoothing. Our empirical analysis provides support for our predictions. The difference in LLP between the two groups of banks is positive as hypothesized, indicating that bank managers do save earnings through LLP in good times and borrow earnings using LLP in bad times. Similar results are obtained for analysis using discretionary LLP. When bank managers are saving earnings for the future, we provide evidence that the need to obtain external financing is an important additional variable in explaining cross-sectional differences in the extent of income smoothing. Furthermore, whether or not a bank is well capitalized is also weakly significant in explaining cross-sectional differences in income smoothing. Copyright 2003 by Kluwer Academic Publishers

Suggested Citation

  • Kanagaretnam, Kiridaran & Lobo, Gerald J & Mathieu, Robert, 2003. "Managerial Incentives for Income Smoothing through Bank Loan Loss Provisions," Review of Quantitative Finance and Accounting, Springer, vol. 20(1), pages 63-80, January.
    • Handle: RePEc:kap:rqfnac:v:20:y:2003:i:1:p:63-80
    as

    Download full text from publisher

    File URL: http://journals.kluweronline.com/issn/0924-865X/contents
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:20:y:2003:i:1:p:63-80. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.