The Market Reaction Analysis of Bank’s NPL Handling in Taiwan’s Banking Industry

The purpose of this study is to investigate how the market reacts to the bank’s handling of the Non-Performance Loans (hereafter NPLs). We aim to examine the following two research questions.
1. How do Taiwan’s investors react to both differential accounting methods for the loss of NPL dispositions?
2. Does there exist significant difference in Taiwan’s investors’ reactions to quarterly earnings reports?

The samples examined include all banks listed in TSE (Taiwan Securities Exchange) from 1999/Q1 to 2004/Q1, about 350 firm/quarter observations. We adopt multiple regression to analyze the relationship between the banks’ abnormal return (or loss) and the NPL related variables in the quarterly financial report. The empirical findings are as follows.
1. The abnormal returns accompanying the earnings announcements appear to be positively correlated with bank earnings and negatively correlated with the loss of NPL disposition.
2. Taiwan’s investors perceive the disposal of NPL as a “bad news” since such conducts will increase expense and lower earnings.
3. The above market reactions are more pronounced in the second quarter than in other three quarters.