Keeping up with the Joneses? Evidence from Peer Performance in the Banking Industry |
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Authors: | Wassim Dbouk Lawrence Kryzanowski |
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Institution: | 1. Department of Finance, Accounting and Managerial Economics, Suliman S. Olayan School of Business, American University of Beirut, Beirut, Lebanon;2. Department of Finance, John Molson School of Business, Concordia University, 1455 de Maisonneuve Blvd. West, Montreal, P.Q., Canada |
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Abstract: | This paper traces the reaction of US banks to ROE underperformance on liquidity creation, equity capital, and loan loss provisions. We find that banks change their structures in the subsequent quarter after underperformance by increasing their on-balance and off-balance sheet liquidity creation to increase profitability. Banks tend to increase their equity capital and improve their loan quality by lowering non-discretionary loan loss provisions to become safer. Banks signal their ability to overcome underperformance by increasing their discretionary loan loss provisions. Our results reveal that large banks rely mainly on off-balance sheet liquidity creation as their primary tool to recover from underperformance while medium-size and small banks adjust their equity capital to increase their safety. |
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Keywords: | Liquidity creation Earnings management Financial performance (non-) discretionary loan loss provisions Risk management |
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