Journal
JOURNAL OF BUSINESS RESEARCH
Volume 58, Issue 3, Pages 312-320Publisher
ELSEVIER SCIENCE INC
DOI: 10.1016/j.jbusres.2003.06.002
Keywords
signaling; loan loss provision; earnings variability; investment opportunity set; income smoothing
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This study investigates whether bank managers use their discretion in estimating loan loss provisions (LLP) to convey information about their banks' future prospects. Bank managers' propensities to signal their private information vary cross sectionally because they face different conditions and have different incentives. This study hypothesizes that the propensity to signal varies negatively with bank size and positively with earnings variability, future investment opportunities, and degree of income smoothing. The empirical evidence supports these predictions. It suggests that the propensity to signal is positively related to the degree of information asymmetry and that bank managers attenuate perceived undervaluation of their banks by communicating their private information about their banks' favorable future prospects. (C) 2003 Elsevier Inc. All rights reserved.
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