Income Smoothing Over the Business Cycle: Changes in Banks' Coordinated Management of Provisions for Loan Losses and Loan Charge-Offs from the Pre-1990 Bust to the 1990s Boom

Posted: 31 Oct 2005

See all articles by Stephen G. Ryan

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business

Chi-Chun Liu

National Chengchi University

Abstract

Prior research shows that during the pre-1990 bust financially weak banks managed income upward by delaying provisions for losses on heterogeneous loans. In contrast, we predict and find that during the 1990s boom profitable banks managed income downward by accelerating provisions for losses on homogeneous loans. Profitable banks obscured their income smoothing by accelerating charge-offs of homogeneous loans and by recording more gross charge-offs to offset recoveries of previously charged-off loans. Over the three years subsequent to the acceleration of charge-offs, they had higher and more persistent income before provisions for loan losses than other banks, consistent with income smoothing over a prolonged horizon.

Keywords: Income smoothing, business cycle, banks, provisions for loan losses, loan charge-offs

JEL Classification: G21, M41, M43

Suggested Citation

Ryan, Stephen G. and Liu, Chi-Chun, Income Smoothing Over the Business Cycle: Changes in Banks' Coordinated Management of Provisions for Loan Losses and Loan Charge-Offs from the Pre-1990 Bust to the 1990s Boom. Accounting Review, March 2006, Available at SSRN: https://ssrn.com/abstract=826025

Stephen G. Ryan (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street, Suite 10-73
New York, NY 10012-1118
United States
212-998-0020 (Phone)

Chi-Chun Liu

National Chengchi University

No. 64, Chih-Nan Road
Section 2
Wenshan, Taipei 11623
Taiwan

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