Bank earnings management and analyst coverage: evidence from loan loss provisions

Yongtao Hong, Fariz Huseynov, Sabuhi Sardarli and Wei Zhang ()
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Yongtao Hong: North Dakota State University
Fariz Huseynov: North Dakota State University
Sabuhi Sardarli: Kansas State University
Wei Zhang: North Dakota State University

Review of Quantitative Finance and Accounting, 2020, vol. 55, issue 1, No 2, 29-54

Abstract: Abstract We investigate the role of loan loss provisions in analysts’ decision to follow banks. We find that abnormal loan loss provisions (ALLP), regardless of whether it is income-increasing or income-decreasing, reduce analyst coverage. We interpret this effect with the finding that the greater magnitude of ALLPs decreases the accuracy and increases the dispersion of analysts’ forecasts. In addition, the volatility in ALLPs leads to the decrease in analyst coverage as well. We also find a pecking order for lead analysts’ decisions in a noisy information environment. Lead analysts prefer to follow financial institutions with more accurate loan loss provisions first, then with more positive (incoming-decreasing) ALLPs, and are less likely to follow those with negative (income-increasing) ALLPs. Our findings are robust to endogeneity concerns and indicate that lead analysts are deterred from more aggressive bank earnings management.

Keywords: Bank earnings management; Analyst coverage; Loan loss provisions; Forecast accuracy; G20; G21; G29 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (9)

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DOI: 10.1007/s11156-019-00835-2

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