The Effect of Bank’s Disclosure on the Market Reaction to and Loan Loss Provisions

Abstract

This paper examines whether a bank’s disclosure level affects the loan loss provision (LLP) and the stock price’s response to it using commercial banks and bank holding companies in 41 countries. We find that banks with higher disclosure levels tend to do less discretionary LLPs after controlling for the banks’ incentives for discretionary accounting and the level of their home country’s disclosure requirements and private monitoring. We also find that the stock prices of banks with higher disclosure levels respond less to LLPs than do those of banks with lower disclosure levels. These results imply that public disclosure has a commitment effect on bank managers’ LLP accounting and reduces surprises from LLP announcements.