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Information effects of loan portfolio quality on bank value

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Abstract

In this paper, the authors test whether loan-loss reserve announcements by individual commercial banks can have contagion effects on the banking industry. It is found that increased loan-loss reserves related to LDC debt do not have an effect on other banks. However, increased loan-loss reserves related to bad real estate loans elicited a negative share price response at other banks. The signal from a loss reserve adjustment is dependent on the reason for the adjustment. While LDC debt problems were restricted to money center banks and were well publicized, real estate loan problems can be contagious throughout the industry. Consequently, signals of real estate loan problems at some banks can cause a reduced valuation of other banks.

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Authors and Affiliations

  1. Florida Atlantic University, 33431-0991, Boca Raton, FL

    Jeff Madura & Emilio R. Zarruk

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  1. Jeff Madura
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  2. Emilio R. Zarruk
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Madura, J., Zarruk, E.R. Information effects of loan portfolio quality on bank value. J Econ Finan 16, 27–40 (1992). https://doi.org/10.1007/BF02919791

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  • DOI: https://doi.org/10.1007/BF02919791

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