Do commercial banks of Malaysia use loan loss provision to signal their earnings, return and cash flow?

Abstract

Loan-loss provisions (LLP) are used as a tool to control credit risk so are directly related to loan loss reserves. Managers use LLP to achieve certain objectives such as earnings and capital management, and as a mechanism of signaling view to investors, shareholders and users of financial report. Recently, considerable attention has been paid to signaling view of LLP. Thus, it would be appropriate to examine the signaling view of LLP by examining the relationship between LLP and future earnings, return and cash flow in commercial banks of Malaysia. This study presented in this paper investigated 12 commercial banks regulated by Bank Negara Malaysia for the period of 2004-2011, using a panel data approach. The result of this study indicates a significant positive relationship between the LLP and future returns. However, there is not enough evidence to support the positive relationship between LLP and future earnings and cash flow.