DIFFERENTIAL VALUATION IMPLICATIONS OF LOAN LOSS PROVISIONS ACROSS BANKS AND FISCAL QUARTERS

Prior research has found that loan loss provisions are positively asso ciated with bank stock returns and future cash flows, conditional on l ess discretionary information about loan default. We find that these p ositive valuation implications obtain only for loan loss provisions fo r low regulatory capital ban ks in the fourth fiscal quarter. Our regu latory capital-based tests are motivated by the idea that increased di scretionary loan loss provisions are plausibly good news only for bank s which appear to have loan default risk problems based on prior infor mation. Our fiscal quarter tests are motivated by findings in prior li terature that suggest that managers have incentives to delay income de creasing accruals until the fourth quarter when the audit occurs, impl ying that income decreasing accruals are more likely, and therefore mo re expected, in the fourth quarter than in other fiscal quarters (Mend enhall and Nichols 1988; Boyd et al. 1993).