Income smoothing in the banking industry

Abstract

In this study, I investigate some of the possible correlates of income smoothing. I try to find a relation between the provision for loan losses and some variables used in the related literature. I try to contribute to the literature by adding the change in stock price as a motivator for income smoothing. The volatility of a company’s stock price is not desirable by investors. This is why a change in stock price motivates firms to smooth income using loan loss provisions in order to give an image of stability. I use a sample of 79 of the largest banks listed in the New York Stock Exchange by market capitalization as of end of 2009 during the period of 1993-2009. The results show no significant relation between the change in stock price and loan loss provisions, but the other variables remain more or less consistent with the literature with a strong level of significance.