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Sponsored by the Center for Science and Technology Development of the Ministry of Education
Supervised by Ministry of Education of the People's Republic of China
The inadequacy of commercial banks\' loan loss provisioning will lead to adverse economic consequences. Using a sample of Chinese listed commercial banks from 2003 to 2014, this paper examines the relationship between CEO overconfidence and loan loss provisioning. Empirical results show that overconfident CEOs recognize lower loan loss provisions compared to other CEOs, and the negative effect of CEO overconfidence on loan loss provisioning is greater for firms which face greater uncertainty. Channel analysis further suggests that the negative relationship between CEO overconfidence and loan loss provisioning is partly driven by overconfident CEOs\' low sensitivity to expected loan losses, which results in delayed expected loss recognition. This paper informs the current debate over the accounting for credit losses and suggests that managerial characteristics may affect expected loss recognition.
Keywords:Accounting; CEO Overconfidence; Loan Loss Provisioning; Uncertainty; Discretion