The Role of economic variables and credit portfolio attributes for estimating discretionary loan loss provisions in Brazilian banks

José Dantas, Otávio Medeiros and Paulo Lustosa
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José Dantas: University of Brasília
Otávio Medeiros: University of Brasília
Paulo Lustosa: University of Brasília

Brazilian Business Review, 2013, vol. 10, issue 4, 65-90

Abstract: The study assesses whether incorporating macroeconomic variables and attributes of the loan portfolio improves the specification of models designed to identify management discretion in making loan loss provisions by banks, considering the standards issued by regulatory agencies. The empirical tests confirm the consistency of the proposed model based on the expected signs of the explanatory variable’s parameters and their statistical significance. These results were confronted with those of other models found in the literature by comparing the models’ adjusted R2s, by applying Vuong’s (1989) model selection test, by using an F test for nested models, and by analyzing the persistence of the non-discretionary components of loan loss provisions, which shows that the incorporation of macroeconomic variables and attributes of the loan portfolio improves the empirical investigation of discretion practiced by banks.

Keywords: Loan loss provision; discretion; banks; earnings management; Brazil. (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (2)

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