Research On Signaling Effect Relationship Of Loan Loss Provision And Dividend Distribution In Commercial Banks Of China

With the integration of the world economy and increasing competition, business types and their associations in commercial banks are greatly enhanced. Bank managers often use a variety of methods to pass messages to the outside investors. Since more and more Chinese commercial banks have reformed and listed in recent years, the business risk is also increased. Listed commercial banks play an important role in the healthy development of the national economy. Therefore, the developments of Chinese commercial banks are paid more and more attentions to.Many studies have shown that the loan loss provision is a select accounting policy in commercial bank management. It is also the bank provision fund which is against credit risk that may arise, accord to the loan business, and determine the likelihood of future losses in commercial banks. In2001,"Financial Accounting System" executed. The system requires that banks should fully investigate the strength of the borrower’s repayment and consider the actual needs of the bank’s own internal management, to identify the amount of uncollectible loans to determine the risk of unrecovered loans and recovery possibilities in end of accounting period. If there is objective evidence of impairment of the loan, the bank should be provision for loan loss reserves in accordance with the loan. With the deepening of financial globalization and the "Basel III" introduced to perform, major commercial banks began to focus on the management of loan loss provision. Since the provision for loan loss reserves have multiple effects and incentives, many banks can manipulate their own decisions loan loss provision to ease profit fluctuations and to pass corporations information to the outside world. In other words, the corporations have low risk and good business prospects.On the other hand, signaling theory of dividend distribution considers that corporate managers often pass good news to the outside through changing dividend. The dividend distribution policy of commercial banks usually has a strong signaling effect. Meanwhile, commercial banks will take advantage of lower costs of information disclosure channels (such as alternative accounting policies), reduce the negative impact of dividend changes, and pass corporate information to outside investors.Therefore, changes in dividend policy and the loan loss provision levels are tools for transmitting signals. But, it is worth that the level of loan loss provision is the choice of accounting policy decisions, and the level of dividend belongs to the category of financial policy decisions. Then, is there any potential relationship between these two signal policies in commercial banks? Is the relationship between loan loss provision signal and dividend signal compensation or substitution? In this article, we will explore loan loss provision signaling problems and the relationship between the loan loss provision and the dividend distributions by empirical research methods.This article empirically tests the relationship between the accounting policy signals and financial policy signals of Chinese commercial banks, with the data of15commercial banks of China from2006to2012. In these tests, the results presented that bank managers may signal simultaneously with an accounting policy (Loan Loss Provision) and a financial policy (dividend change). When managers predict the bank will continue to maintain high profits, they will increase the loan loss provision levels to pass good and stable business operation and prospect signals to the outside world. On the other hand, the bank’s managers in order to reduce the impact of asymmetric information may choose multiple signals to reach maximum efficiency possibilities. Thus, the loan loss provision signal and dividend distribution signal supplement each other.