Accounting Department's Lecture

Theme：Branching and window dressing: Banks’ strategical use of loan loss provisions

Speaker：Zhu jigao（University of International Business and Economics）

Coordinator：Jingyu Gao

Time：2019-11-19 10:00

Address：Room 706, Mingde Business Building

Language：Chinese

Abstract：

We explore a signaling channel that banks strategically raise loan-loss provisions (LLPs) prior to application for branching to impress banking regulators. Since deregulation on geographic restriction, city commercial banks (CCBs) can apply for inter-province branching but still need approval from the regulator. CCBs may dressup financial reports by higher LLPs, which present an overly positive image to impress regulators and thereby increase the likelihood of approval. We document evidence in line with the signaling story of window dressing. To address the endogenous decision of branching application, we employ propensity score matching estimators and a quasi-natural experiment of deregulation reversal. In addition, our results are robust to placebo tests of alternate timing of application. We rule out other explanations for adjusting LLPs, particularly earnings management.