PEER EFFECT IN BANK FINANCIAL REPORTING: EVIDENCE FROM LOAN LOSS PROVISION

LI YUEHUA

Publication

PEER EFFECT IN BANK FINANCIAL REPORTING: EVIDENCE FROM LOAN LOSS PROVISION

LI YUEHUA

Abstract

I find a positive peer effect exists among U.S. public Bank Holding Companies’ loan loss provisions. Peer effect is economically and statistically significant. Peer effect improves the timeliness of bank loan loss recognition as the association between loan loss provision and future non-performing loan increases. Banks with lower ability are more inclined to incorporate peer actions in their loan loss estimation. Overall, observational learning seems to drive the peer effect in bank loan loss recognition. However, I also find evidences that suggest banks may mimic others due to regulatory scrutiny and performance pressure. The existence of peer effect in bank loan loss recognition has policy implications for both bank regulators and practitioners.