Malaysian Commercial Banks: Do Income Smoothing, Capital Management, Signaling, and Pro-Cyclicality Exist Through Loan Loss Provisions?

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Author	Azira Abdul Adzis, Herman Shah Anuar, Noor Shahieda Mohd Hishamuddin
ISSN	2307-2466
On Pages	68-76
Volume No.	4
Issue No.	2
Issue Date	April 01, 2020
Publishing Date	April 01, 2020
Keywords	Income Smoothing, Capital Management, Signaling, Pro-Cyclical, Loan Loss Provisions, Malaysian Banks, Financial Crisis

Abstract

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.

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