Loan loss provisions and return predictability: A dynamic perspective

This paper examines the impact of loan loss provisions (LLPs) on return predictability during 1994–2017. We find that average, LLPs are negatively associated with one year ahead stock returns. effect is particularly significant global financial crisis but much weaker Basel II and III periods. Consistent these findings, a long–short trading strategy based generates positive abnormal returns periods negative crisis. Cross-sectional tests show this more pronounced among banks greater information asymmetry. Decomposition suggests findings driven mainly by nondiscretionary LLPs. Overall, our results suggest relationship between future not linear contingent bank regulations macroeconomic conditions.