Earnings Momentum and Bank Loan Quality

48 Pages Posted: 24 Nov 2020

See all articles by Shuping Chen

Shuping Chen

University of Texas at Austin - Red McCombs School of Business

John M. McInnis

University of Texas at Austin - Department of Accounting

Christopher G. Yust

Texas A&M University

Date Written: October 5, 2020

Abstract

In the aftermath of the financial crisis, bankers, regulators, lawmakers, and others claimed that bank CEOs’ incentives to sustain high past earnings growth (earnings momentum) led banks to originate lower quality loans, which subsequently defaulted at high rates in the financial crisis. We examine this claim. Using a sample of 267 U.S. bank holding companies from 2001 to 2009, we find banks with high earnings momentum have more future non-performing loans (NPLs). In contrast, neither CEO compensation incentives nor benchmark beating metrics are associated with future NPLs. Consistent with career concerns, the effect of earnings momentum on future NPLs is concentrated in banks with younger CEOs. We also find earnings momentum is positively associated with bank failures. Further analyses show results are independent of competition pressures and earnings guidance. Our study contributes to the literature on factors associated with the dramatic collapse of the banking system during the financial crisis.

Keywords: banks, earnings growth momentum, financial crisis, loan defaults, bank failures, compensation incentives, benchmark beating

JEL Classification: G01, G18, G21, G38, M41, M48

Suggested Citation

Chen, Shuping and McInnis, John M. and Yust, Christopher G., Earnings Momentum and Bank Loan Quality (October 5, 2020). Available at SSRN: https://ssrn.com/abstract=3705677 or http://dx.doi.org/10.2139/ssrn.3705677

Shuping Chen

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States
521.471.5328 (Phone)

John M. McInnis

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-232-6791 (Phone)

Christopher G. Yust (Contact Author)

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States
979.845.3439 (Phone)

HOME PAGE: http://www.christopheryust.com

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