Loan Loss Provisions and Bank Stock Returns

24 Pages Posted: 8 Apr 2019 Last revised: 24 May 2019

See all articles by Yuna Heo

Yuna Heo

Rutgers Business School - Rutgers University

Date Written: January 8, 2019


This paper examines the asset pricing implication of loan loss provisions (LLP). LLP is a bank’s dominant accrual and a key determinant of informativeness of banks’ financial reports. We find banks with low LLP have significantly higher returns than banks with high-LLP. A long-short investment strategy that buys stocks in the lowest LLP portfolio and sells in the highest LLP portfolio earns statistically significant alpha of 97 basis points per month. The predictive power of LLP is prevalent after controlling for size and bank capital. Further analyses suggest the effect of LLP arises because investors do not fully understand information on LLP, which leads to mispricing.

Keywords: Loan Loss Provisions; Banking; Accruals; Return Predictability, Mispricing

JEL Classification: G12, G21

Suggested Citation

Heo, Yuna, Loan Loss Provisions and Bank Stock Returns (January 8, 2019). Available at SSRN: or

Yuna Heo (Contact Author)

Rutgers Business School - Rutgers University ( email )

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