Loan loss provision decisions: An empirical analysis of the Spanish depository institutions

Document Type

Article

Publication Date

1-1-2005

Abstract

Accountants and financial economists have long held concerns that inefficient loan loss accounting may have a material impact on reported capital and earnings, especially in the banking industry. Prior research has examined banks' incentives to manipulate loan loss provisions (LLPs) and the resulting impact. However, most of this research has focused on management incentives and other determinants of LLP decisions without addressing the relevant factors associated with best-practiced or efficient LLP decision-making. In this paper, we identify a stochastic frontier model that examines the "efficiency" of the LLP decisions of bank managers. Further we explore the relationship between efficient LLP decision-making and relevant factors that could potentially explain any inefficiency. Our evidence indicates that there is considerable inefficiency in loan loss decision-making among the sample institutions. The research is based on data from the Spanish banking industry, which is particularly relevant in light of the recent deregulatory initiatives in Spain. The findings in this study with regard to the existence of inefficiency in loan loss decisions and the causes of such inefficiency have far-reaching implications for regulators throughout Europe. © 2005 Elsevier Inc. All rights reserved.

Identifier

15844378754 (Scopus)

Publication Title

Journal of International Accounting Auditing and Taxation

External Full Text Location

https://doi.org/10.1016/j.intaccaudtax.2005.01.004

ISSN

10619518

First Page

55

Last Page

77

Issue

1

Volume

14

Grant

BEC2002-02852

Fund Ref

Fundación BBVA

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