Hedge fund activism and loan loss provisioning in U.S. banks

Dmytro Holod, Yuriy Kitsul and Gӧkhan Torna

Journal of Banking & Finance, 2025, vol. 178, issue C

Abstract: In this study, we explore the hedge fund activist (HFA) influence on managerial decisions in the opaque banking industry. Focusing on loan loss provisions (LLPs), an accounting item that is subject to considerable managerial discretion as well as scrutiny from various regulatory agencies, we find that HFAs alleviate the agency problems associated with bank loan loss provisioning decisions. The findings show that HFA influence leads to a substantial reduction in overstatements, but not understatements, of LLPs at target banks. This results in a prompt increase in bottom-line profitability and stock returns, while pointing to no appreciable change in bank risk. We conclude that the disciplinary effect of HFAs contributes to shareholder value by leading to a reduction in excessive loan loss provisioning consistent with a realignment of LLP decisions with target bank shareholders’ interests.

Keywords: Hedge fund activism; Banking; Loan loss provisions; Transparency; Agency conflict; Shareholder value (search for similar items in EconPapers)
JEL-codes: G21 G28 G31 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:178:y:2025:i:c:s0378426625001396

DOI: 10.1016/j.jbankfin.2025.107519

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