Alternative Evidence and Views on Asymmetric Loan Loss Provisioning

33 Pages Posted: 26 Oct 2020

See all articles by Anne Beatty

Anne Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Scott Liao

University of Toronto - Rotman School of Management

Date Written: September 4, 2020

Abstract

Based on a linear provision/charge-off association and V-shaped scatter-plots of these variables against nonperforming loan changes, Basu et al. (2020) argue that nonperforming loan changes mis-measure credit quality and linear provision models are mis-specified. They conclude that residual asymmetry controlling for charge-offs results from loan heterogeneity and the real estate crisis. Using additions to non-accruals to measure credit quality, we find a linear association with provisions, that controlling for charge-offs induces mis-specification, and no evidence of provision asymmetry. These results highlight the importance of basing hypotheses and causal models on theoretical underpinnings rather than on plots subject to known fallacies.

Keywords: Loan Loss Provisions, Methodology

JEL Classification: M41, G20

Suggested Citation

Beatty, Anne L. and Liao, Wei-Yi (Scott), Alternative Evidence and Views on Asymmetric Loan Loss Provisioning (September 4, 2020). Journal of Accounting & Economics (JAE), Vol. 70, No. 2-3, 2020, Available at SSRN: https://ssrn.com/abstract=3687307 or http://dx.doi.org/10.2139/ssrn.3687307

Anne L. Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Wei-Yi (Scott) Liao (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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