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Value Relevance of Add-back of Loan Loss Reserves

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Authors
Ahn, Hyejin; Kim, Young Jun
Issue Date
2019-12
Publisher
College of Business Administration (경영대학)
Citation
Seoul Journal of Business, Vol.25 No.2, pp. 93-114
Keywords
Add-backsloan loss reservesregulatory capitalvalue relevance
Abstract
Under the current bank regulatory capital framework, loan loss reserves (LLR) are added back to regulatory capital up to a certain limit (henceforth, 'add-backs'). This study examines how equity investors value these addbacks. Decomposing LLR into add-backs and other LLR, we find that add-backs have positive value relevance if such add-backs increase total regulatory capital and other LLR has negative value relevance. This positive value relevance of add-backs is driven by banks with low capital levels. Our finding indicates that the market perceives add-backs as capital rather than as an expense. [ABSTRACT FROM AUTHOR] Copyright of Seoul Journal of Business is the property of Seoul National University, College of Business Administration and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)
ISSN
1226-9816
Language
English
URI
https://hdl.handle.net/10371/168287
DOI
https://doi.org/10.35152/snusjb.2019.25.2.004
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College of Business Administration/Business School (경영대학/대학원)Dept. of Business Administration (경영학과)Seoul Journal of BusinessSeoul Journal of Business Volume 25, Number 1/2 (2019)
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