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The impacts of Allowance for Doubtful Bank loans on the cost of equity: an empirical study of Korean Banks

은행 대손충당 적립과 자기자본 비용의 관계

  • Yoon, Jong-Chul (Department of Accounting, Keimyung University) ;
  • Lee, Sang-Wook (Department of Business Administration, Seoul National University of Science and Technology)
  • 윤종철 (계명대학교 회계학과) ;
  • 이상욱 (서울과학기술대학교 경영학과)
  • Received : 2017.02.09
  • Accepted : 2017.05.12
  • Published : 2017.05.31

Abstract

The purpose of the study is to empirically investigate how the higher allowance ratio for bank loans affects the cost of equity using Korean banks from 2002- 2015. First of all, we analyzed the impact of the higher allowance ratio on the cost of equity for Korean banks. Secondly, from the perspective of governance structure, we analyzed the existence of different impacts whether banks were affiliated with financial holding companies. The results showed an increasing impact of higher allowance ratio on the cost of equity for Korean banks. Also, we found these impacts differ whether the banks are affiliated with financial holding companies. The results indicate that the burden of higher allowance ratios for bank loans may provide negative impacts on capital markets. The higher the allowance ratio, which means the greater risk for banks, may help to increase the cost of equity concerning Korean banks.

Keywords

Allowance;Governance structure;Capital ratio;Cost of equity;Bank industry

Acknowledgement

Supported by : 서울과학기술대대학교

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