When Is “Bad News” Viewed as “Good News”?

William H. Beaver, Stephen G. Ryan and James M. Wahlen

Financial Analysts Journal, 1997, vol. 53, issue 1, 45-54

Abstract: Recent research has shown that discretionary loan loss provisions are positively associated with bank stock returns and future earnings. The good news signaled by discretionary provisions is most prominent for banks with greater incentive to signal good news (e.g., low-regulatory-capital banks with potential loan default problems); for banks with greater degrees of accounting discretion over the loan loss provision (e.g., banks with portfolios with a high proportion of commercial loans); and for provisions in the fourth quarter, which is audited. Banks with low regulatory capital that record large fourth-quarter loan loss provisions adopt more-conservative future loan growth strategies and generate substantial improvement in future earnings. These results suggest that bank managers increase discretionary provisions to signal “good news” about future earnings and that increased discretionary provisions are associated with other, less observable management actions that increase the value of the bank.

Date: 1997
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DOI: 10.2469/faj.v53.n1.2055

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