Do income smoothing, capital management, signaling, and pro-cyclicality exist through loan loss provisions? Evidence from Malaysia commercial banks

Loan loss provisions are the main accrual expenses charged to bank income statement to absorb loan losses arising from loans default. The main purpose of this dissertation is to examine whether Malaysia commercial banks use loan loss provisions as a tool in income smoothing, capital management, and signaling. This dissertation also examines whether pro-cyclicality exists through loan loss provisions in Malaysia. Covering period from 2002 to 2012, the results indicate that Malaysian commercial banks do smooth income through loan loss provisions but no evidence for capital management. This dissertation also finds no evidence for Malaysia commercial banks to signal private information to outsiders. Although there is a negative coefficient between loan loss provisions and GDP, the results demonstrate that Malaysian commercial banks do not involve in pro-cyclical behavior through loan loss provisions. The results also show that the global financial crisis in 2008 does not affect loan loss provisions of Malaysian commercial banks

Malaysian commercial banks: Do income smoothing, capital management, signaling, and pro-cyclicality exist through loan loss provisions?

Existing literature argues that loan loss provisions are subject to managerial discretion and commonly associated with the issues of income smoothing, capital management, signaling and pro-cyclicality.The main objective of this study is to examine the evidence of income smoothing, capital management, signaling, and pro-cyclical behavior through loan loss provisions of Malaysian commercial banks for period 2002-2012.Using a sample of 15 commercial banks, the results indicate that Malaysian commercial banks do smooth income through loan loss provisions while on the other hand, no conclusive evidence to support that Malaysian commercial banks manage capital through loan loss provisions.As for the signaling and pro-cyclicality, no concrete evidence to support Malaysian commercial banks engages in signaling activities and pro-cyclicality through loan loss provisions.This study also controls for the effect of 2007-2009 global financial crisis on loan loss provisioning of Malaysian commercial banks.The results indicate that Malaysian commercial banks put aside more provisions during the financial crisis