M. Elnahass
Loan loss provisions, bank valuations and discretion: A comparative study between conventional and Islamic banks.
Elnahass, M.; Izzeldin, M.; Abdelsalam, O.
Abstract
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.
Citation
Elnahass, M., Izzeldin, M., & Abdelsalam, O. (2014). Loan loss provisions, bank valuations and discretion: A comparative study between conventional and Islamic banks. Journal of Economic Behavior and Organization, 103(Supplement), S160-S173. https://doi.org/10.1016/j.jebo.2013.08.018
Journal Article Type | Article |
---|---|
Acceptance Date | Aug 30, 2013 |
Publication Date | 2014-07 |
Deposit Date | Oct 6, 2014 |
Journal | Journal of Economic Behavior and Organization |
Print ISSN | 0167-2681 |
Publisher | Elsevier |
Peer Reviewed | Peer Reviewed |
Volume | 103 |
Issue | Supplement |
Pages | S160-S173 |
DOI | https://doi.org/10.1016/j.jebo.2013.08.018 |
Keywords | Islamic banks, Conventional banks, Value relevance, Loan loss provisions, Earnings management. |
Public URL | https://durham-repository.worktribe.com/output/1420023 |
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