Within–Bank Holding Company Accounting Information and Internal Capital Allocation

We examine whether loan loss provision validity (i.e., the extent of loan loss provisions mapping into future charge offs) within the bank holding company (BHC) is associated with internal capital allocation efficiency. Exploiting the filing requirements for subsidiary banks, we find that within-BHC provision validity, our measure of internal information quality, is positively associated with internal capital market efficiency. We also find that this association is concentrated in BHCs more likely to allocate capital to take advantage of subsidiary lending opportunities and BHCs with higher internal information asymmetry. These findings suggest that within-BHC accounting information that better reflects subsidiary bank loan performance mitigates information problems between headquarters and subsidiary managers in internal capital allocation. This study contributes to our understanding of how loan loss provision information of lower-level entities within the organization is associated with headquarters capital allocation and helps mitigate internal information asymmetry within banking organizations. This paper was accepted by Ranjani Krishnan, accounting. Funding: The authors thank the University of Toronto, Wharton School, and Temple University for financial support. A. Nicoletti gratefully acknowledges financial support from the Alfred H. Williams Faculty Scholar Award. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2024.05313 .