Signaling view of Loan Loss Provision in Islamic Banks of Malaysia.

Author(s)

Ali Karimiyana , Mohd Norfian bin Alifiah , Ali Nasserinia ,

Download Full PDF Pages: 42-48 | Views: 430 | Downloads: 115 | DOI: 10.5281/zenodo.3457687

Volume 3 - September 2014 (09)

Abstract

Loan Loss Provision (LLP) has been a major element in the bank profits fluctuations in recent years. Loan loss provision is used as a tool to control credit risk. There has been considerable attention to signaling view of loan loss provision. After the recent global financial crisis in 2008, banks were concerned about the low level of their loan-loss provision. Since results via earning management and capital management are less forward looking, this study intends to examine the signaling aspect of loan loss provision. This paper investigates Islamic banks regulated by Bank Negara Malaysia for the period of 2008-2012, using a panel data approach. The result of this study indicates a significant positive relationship between the loan loss provision and future earning.

Keywords

Loan Loss Provision (LLP), Signaling view, earning management and capital management;

References

  1. Ahmed, A. S., Takeda, C., and Thomas, S. (1999). Bank loan loss provisions: a reexamination of capital management, earnings management and signaling effects. Journal of Accounting and Economics, 28(1), 1-25.
  2. Anandarajan, A., Hasan, I., and Lozano-Vivas, A. (2003). The role of loan loss provisions in earnings management, capital management, and signaling: The Spanish experience. Advances in International Accounting, 16, 45-66.
  3. Anandarajan, A., Hasan, I., and McCarthy, C. (2005). The use of loan loss provisions for earnings, capital management and signalling by Australian banks. CRIF Working Paper series, 5.
  4. Beatty, A., Chamberlain, S. L., and Magliolo, J. (1995). Managing financial reports of commercial banks: The influence of taxes, regulatory capital, and earnings. Journal of Accounting Research, 33(2), 231-261.
  5. Beaver, W. H., and Engel, E. E. (1996). Discretionary behavior with respect to allowances for loan losses and the behavior of security prices. Journal of Accounting and Economics, 22(1), 177-206.
  6. Chang, R.-D., Shen, W.-H., and Fang, C.-J. (2011). Discretionary Loan Loss Provisions And Earnings Management For The Banking Industry. International Business & Economics Research Journal (IBER), 7(3).
  7. Collins, J. H., Shackelford, D. A., and Wahlen, J. M. (1995). Bank differences in the coordination of regulatory capital, earnings, and taxes. Journal of Accounting Research, 33(2), 263-291.
  8. Curcio, D., and Hasan, I. (2008). Earnings and Capital Management and Signaling: The Use of Loan-Loss Provisions by European Banks. January, European Financial Management.
  9. DeBoskey, D. G., and Jiang, W. (2012). Earnings management and auditor specialization in the post-sox era: An examination of the banking industry. Journal of Banking & Finance, 36(2), 613-623.
  10. Dong, X., Liu, J., and Hu, B. (2012). Research on the Relationship of Commercial Bank's Loan Loss Provision and Earning Management and Capital Management. Journal of Service Science & Management, 5(2).
  11. Elliott, J. A., Hanna, J. D., and Shaw, W. H. (1991). The evaluation by the financial markets of changes in bank loan loss reserve levels. Accounting Review, 847-861.
  12. Greenawalt, M. B., and Sinkey, J. F. (1988). Bank loan-loss provisions and the income-smoothing hypothesis: an empirical analysis, 1976–1984. Journal of Financial Services Research, 1(4), 301-318.
  13. Griffin, P. A., and Wallach, S. J. (1991). Latin American lending by major US banks: The effects of disclosures about nonaccrual loans and loan loss provisions. Accounting Review, 830-846.
  14. Gujarati, D. N. (2003). Basic Econometrics. 4th: New York: McGraw-Hill.
  15. Kanagaretnam, K., Lim, C. Y., and Lobo, G. J. (2010). Auditor reputation and earnings management: International evidence from the banking industry. Journal of Banking & Finance, 34(10), 2318-2327.
  16. Kanagaretnam, K., Lobo, G. J., and Yang, D.-H. (2005). Determinants of signaling by banks through loan loss provisions. Journal of Business Research, 58(3), 312-320.
  17. Kanagaretnam, K., Lobo, G. J., and YANG, D. H. (2004). Joint Tests of Signaling and Income Smoothing through Bank Loan Loss Provisions*. Contemporary Accounting Research, 21(4), 843-884.
  18. Karimiyan, A., Nasserinia, A., and Shafiee, H. M. (2013). Relationship between Loan Loss Provision and Future Earning, Return and Cash flow in Commercial Banks of Malaysia. roceedings of 4th Asia-Pacific Business Research Conference(978-1-922069-31-3).
  19. Kim, M.-S., and Kross, W. (1998a). The impact of the 1989 change in bank capital standards on loan loss provisions and loan write-offs. Journal of Accounting and Economics, 25(1), 69-99.
  20. Kim, M. S., and Kross, W. (1998b). The impact of the 1989 change in bank capital standards on loan loss provisions and loan write-offs. Journal of Accounting and Economics, 25(1), 69-99.
  21. Liu, C.-C., and Ryan, S. G. (1995). The effect of bank loan portfolio composition on the market reaction to and anticipation of loan loss provisions. Journal of Accounting Research, 33(1), 77-94.
  22. Liu, C.-C., Ryan, S. G., and Wahlen, J. M. (1997a). Differential valuation implications of loan loss provisions across banks and fiscal quarters. The Accounting Review, 72(1).
  23. Liu, C. C., Ryan, S. G., and Wahlen, J. M. (1997b). Differential valuation implications of loan loss provisions across banks and fiscal quarters. Accounting Review, 133-146.
  24. Ma, C. K. (1988). Loan Loss Reserves and Income Smoothing: the Experience In the U.S. Banking Industry. Journal of Business Finance & Accounting, 15(4), 487-497.
  25. Moyer, S. E. (1990). Capital adequacy ratio regulations and accounting choices in commercial banks. Journal of Accounting and Economics, 13(2), 123-154.
  26. Perez, D., Salas-Fumas, V., and Saurina, J. (2008). Earnings and capital management in alternative loan loss provision regulatory regimes. European Accounting Review, 17(3), 423- 445.
  27. Scholes, M. S., Wilson, G. P., and Wolfson, M. A. (1990). Tax planning, regulatory capital planning, and financial reporting strategy for commercial banks. Review of financial Studies, 3(4), 625-650.
  28. Wahlen, J. M. (1994). The nature of information in commercial bank loan loss disclosures. Accounting Review, 455-478.

Cite this Article: