The Impact of Loan Loss Provision on EU Listed Banks Under Local GAAP and IFRS

Abstract

The aim of this study is to investigate the impact of loan loss provision (LLP) under the International Financial Report Standards (IFRS) and local Generally Accepted Accounting Principles (GAAP) in European publicly traded banks’ earnings and the change of stock prices. For this purpose, I empirically investigate the association between LLPs and earnings, LLPs and change of stock price for 132 banks in 22 European Union (EU) countries. I focus on the importance of LLP research and the trade-off between reliability and relevance of LLP from the perspective of accounting going concern. I include controls for factors that prior research identifies as associated with earnings and change in stock prices, such as LLP in banks total asset as a proxy for banks’ size, and the lagged operational income as a proxy of profitability and the change in GDP (Marton & Runesson, 2016). I hypothesizes that the LLP under IFRS has a higher association with earnings and lower influence in change of bank stock prices than it under local GAAP. From the data analysis for 132 traded banks in EU for the period from 2000 to 2010, I find that the negative magnitude association between LLP and earnings are higher under IFRS/ International Accounting Standard 39 (IAS 39) than it under local GAAP. While as the association between LLP and the change of banks’ stock price under IFRS and local GAAP is not statistically different. Overall, findings are important in understanding the effect of IFRS adoption on market dynamics and information environment. Additionally, they bear implications for accounting professions, policymakers, investors and corporate managers.