Non-Performing Loans and Their Impact on Investor Confidence: A Signaling Theory Perspective—Evidence from U.S. Banks

Richard Arhinful (), Bright Akwasi Gyamfi (), Leviticus Mensah and Hayford Asare Obeng
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Richard Arhinful: Faculty of Management, Multimedia University, Cyberjaya 63000, Selangor, Malaysia
Bright Akwasi Gyamfi: Faculty of Management, Multimedia University, Cyberjaya 63000, Selangor, Malaysia
Leviticus Mensah: Department of Accounting and Finance, World Peace University, 035722 Nicosia, North Cyprus, Turkey
Hayford Asare Obeng: Department of Business Administration, World Peace University, 035722 Nicosia, North Cyprus, Turkey

JRFM, 2025, vol. 18, issue 7, 1-23

Abstract: Bank operations are contingent upon investor confidence, particularly during periods of economic distress. If investor confidence drops, a bank faces difficulties obtaining money, higher borrowing costs, and lower stock values. Non-performing loans (NPLs) potentially jeopardize a bank’s long-term viability and short-term profitability, and investors are naturally wary of institutions that pose a high credit risk. The purpose of the study was to explore how non-performing loans influence investor confidence in banks. A purposive sampling technique was used to identify 253 New York Stock Exchange banks in the Thomson Reuters Eikon DataStream that satisfied all the inclusion and exclusion selection criteria. The Common Correlated Effects Mean Group (CCEMG) and Generalized Method of Moments (GMM) models were used to analyze the data, providing insight into the relationship between the variables. The study discovered that NPLs had a negative and significant influence on price–earnings (P/E) and price-to-book value (P/B) ratios. Furthermore, the bank’s age was found to have a positive and significant relationship with the P/E and P/B ratio. The moderating relationship between NPLs and bank age was found to have a negative and significant influence on price–earnings (P/E) and price-to-book value (P/B) ratios. The findings underscore the importance of asset quality and institutional reputation in influencing market perceptions. Bank managers should focus on managing non-performing loans effectively and leveraging institutional credibility to sustain investor confidence, particularly during financial distress.

Keywords: investor confidence; non-performing loans; price–earnings ratio; price-to-book value ratio; return on equity (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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