Bank loan-loss provisions and the income-smoothing hypothesis: An empirical analysis, 1976–1984 |
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Authors: | Mary Brady Greenawalt Joseph F Sinkey Jr |
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Institution: | (1) Department of Accounting The R. B. Pamplin College of Business, Virginia Polytechnic Institute and State University, USA;(2) Department of Banking and Finance College of Business Administration, The University of Georgia, USA |
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Abstract: | This article tests an income-smoothing hypothesis for a sample of 106 large bank holding companies for the period 1976 to 1984. Our focus is on the behavior of the provision for loan losses as a function of bank income and alternative measures of business conditions likely to affect loan portfolio risk-taking or quality. Using an econometric model with pooled time-series, cross-sectional data, we find evidence of income-smoothing behavior over our test period. Our dummy-variable models indicate that regional banking companies tend to engage in income smoothing more than money-center banks. Alternative motivations for income-smoothing behavior, which include bank regulatory policy, risk management, agency theory, and compensation policy, are explored and their policy implications considered. |
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