Organizational culture, competition and bank loan loss provisioning

Hiep Ngoc Luu, John Wilson*, Linh Nguyen

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

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Abstract

This paper investigates how banks with different organizational cultures (defined as either control-dominant, collaborate-dominant, compete-dominant, create-dominant) manage their loan loss provisions (LLPs) in response to intensified industry competition. For identification, we utilize the change in state-level competition that followed the passage of the US Interstate Banking and Branching Efficiency Act (IBBEA) of 1994 as a quasi-natural experiment. We find that banks with a collaborate-dominant organizational culture are less likely to exercise discretion over LLPs. In contrast, banks with compete- and create-dominant organizational cultures are more likely to utilize discretionary LLPs when competition increases. Moreover, banks use discretionary LLPs to smooth income and signal private information to outsiders. Banks with collaborate-dominant organizational cultures exhibit less income smoothing. Counterparts with a create-dominant organizational culture use discretionary LLPs to signal information to outside stakeholders. Finally, banks with a create-dominant organizational culture are more likely to be subject to formal regulatory enforcement actions.
Original languageEnglish
Number of pages27
JournalEuropean Journal of Finance
VolumeLatest Articles
Early online date4 Apr 2022
DOIs
Publication statusE-pub ahead of print - 4 Apr 2022

Keywords

  • Bank deregulation
  • Competition
  • Discretionary loan loss provisions
  • Organizational culture
  • Textual analysis

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