Abstract
This article tests an income-smoothing hypothesis for a sample of 106 large bank holding companies for the period 1976 to 1984. Our focus is on the behavior of the provision for loan losses as a function of bank income and alternative measures of business conditions likely to affect loan portfolio risk-taking or quality. Using an econometric model with pooled time-series, cross-sectional data, we find evidence of income-smoothing behavior over our test period. Our dummy-variable models indicate that regional banking companies tend to engage in income smoothing more than money-center banks. Alternative motivations for income-smoothing behavior, which include bank regulatory policy, risk management, agency theory, and compensation policy, are explored and their policy implications considered.
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Greenawalt, M.B., Sinkey, J.F. Bank loan-loss provisions and the income-smoothing hypothesis: An empirical analysis, 1976–1984. J Finan Serv Res 1, 301–318 (1988). https://doi.org/10.1007/BF00235201
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DOI: https://doi.org/10.1007/BF00235201