Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Loan loss provisions, bank valuations and discretion
T2 - a comparative study between conventional and Islamic banks
AU - El Nahass, Marwa
AU - Izzeldin, Marwan
AU - AbdElsalam, Omneya
PY - 2014/7
Y1 - 2014/7
N2 - This study investigates the use of reported loan loss provisions (LLP) by investors in their valuations of banks within the Middle East and North Africa region between the years 2006 and 2011. We decompose LLP into discretionary and non-discretionary components to test for differential valuations in the two banking sectors. We use alternative criteria to define the components of LLP in banks: loan quality/size and earnings management/manipulation incentives. We employ a price-level valuation model estimated using two-stage analyses. We find that LLP has positive value relevance to investors in both banking sectors. Investors in Islamic banks price the discretionary component relatively lower than their conventional counterparts. We attribute this result to differences in product and governance structures as well as to the religious perception of Islamic banking. In both banking sectors, investors construe an increase in the non-discretionary component as irrelevant valuation information. Our results are relevant to bank regulators in showing the signalling effect of LLP to bank value and stability.
AB - This study investigates the use of reported loan loss provisions (LLP) by investors in their valuations of banks within the Middle East and North Africa region between the years 2006 and 2011. We decompose LLP into discretionary and non-discretionary components to test for differential valuations in the two banking sectors. We use alternative criteria to define the components of LLP in banks: loan quality/size and earnings management/manipulation incentives. We employ a price-level valuation model estimated using two-stage analyses. We find that LLP has positive value relevance to investors in both banking sectors. Investors in Islamic banks price the discretionary component relatively lower than their conventional counterparts. We attribute this result to differences in product and governance structures as well as to the religious perception of Islamic banking. In both banking sectors, investors construe an increase in the non-discretionary component as irrelevant valuation information. Our results are relevant to bank regulators in showing the signalling effect of LLP to bank value and stability.
KW - Islamic banks
KW - Conventional banks
KW - Value relevance
KW - Loan loss provisions
KW - Earnings management
U2 - 10.1016/j.jebo.2013.08.018
DO - 10.1016/j.jebo.2013.08.018
M3 - Journal article
VL - 103
SP - S160-S173
JO - Journal of Economic Behavior and Organization
JF - Journal of Economic Behavior and Organization
SN - 0167-2681
IS - Supplement
ER -