Abstract
We examine whether and how non-traditional banking activities affect the quality of banks’ financial reporting. We find that a bank’s ratio of non-interest income (derived from nontraditional activities) to total operating income is positively and significantly associated with the magnitude of discretionary loan loss provisions, our proxy for financial reporting quality.
Valuation Insight
Earnings from non-traditional activities (non-interest income) are found to cause banks to increase discretionary loan-loss provisions and, accordingly, imply lower financial reporting quality. From a valuation perspective, the non-interest income therefore has a smaller impact on firm value than interest income.