Loan Loss Provisions and Income-Smoothing Hypothesis: Experience from Turkish Banking Sector

Merve Acar and Mustafa Omer Ipci

Extensive research have examined the role of loan loss provisions in capital and earnings management in banking sector. To date, no studies have explored this relationship in Turkey concept. Using a sample of 28 commercial banks for 2005-2011 period, this study investigates whether banks operating in Turkey use loan loss provisions to smooth their income streams by using panel data analysis. We also test whether loan loss provisions are used as a tool to signal managers‟ expectations about future bank profits to investors. The empirical evidence supports the income smoothing hypothesis for the Turkish Banking Sector but it disappears during the global financial sector crisis (2007-2009 period). It should also be noted that income smoothing behavior of the foreign banks are much more stronger than the domestic banks. Results also confirm the signaling hypothesis that bank managers use loan loss provisions to give some private information about their banks‟ favorable future prospects.