The Role of Asset Diversification in Moderating the Influence of Income Smoothing and Signaling on Loan Loss Provisions

Yudi Yudi; Tutik Siswanti

doi:10.32535/ijafap.v9i3.4770

The Role of Asset Diversification in Moderating the Influence of Income Smoothing and Signaling on Loan Loss Provisions

Yudi Yudi, Tutik Siswanti

Abstract

Loan loss provisions (LLP) are affected by economic conditions as well as managers' income-smoothing and signaling practices, driven by incentives arising from asset diversification. This research investigates the effects of income smoothing and signaling on bank LLPs, moderated by asset diversification. The analysis employs regression techniques using a fixed-effects model. The sample consists of 43 banking firms listed on the Indonesia Stock Exchange, with observations covering 2021–2025. The results show income smoothing (p=0.09) and signaling (p=0.08) are positively associated with LLPs. Asset diversification has no effect on LLPs (p=0.65), but after interacting with signaling (p=0.09), it is shown to strengthen the effect, referred to as quasi-moderation. In contrast, the interaction between asset diversification and income smoothing (p=0.58) does not strengthen the relationship, indicating predictor moderation. These findings are relevant to banks and policymakers when designing stimulus measures intended to preserve liquidity during periods of economic stress. The study also provides empirical evidence concerning the consequences of credit-restructuring policies used as economic stimulus during the COVID-19 period.

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DOI: https://doi.org/10.32535/ijafap.v9i3.4770