Credit Risk and Shareholders’ Value in a Developing Economy: Evidence from Pakistani Banking System

Ahmed Arif, Afsheen Abrar, Mohammad Afzal

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Abstract

The present study examines the role of credit risk in value creation process in banking system of Pakistan. This study here develops a conceptual model with three antecedents to credit risk. These antecedents are loan loss provision, advances, and capital adequacy ratio. The study analyzes the impact of these antecedents on accounting return on equity (ROE) and market return on shares (ROS). The data come from 20 banks listed on Karachi Stock Exchange (KSE) for 2004-2009. The study includes panel data analysis to analyze the relationship between the selected variables. The results of this study expose a minimal role of credit risk in value creation process in banking system of Pakistan. The results further reveal that banks with higher advances in their portfolio are successful in getting the confidence of shareholders.
Original languageEnglish
Pages (from-to)87-95
JournalJournal of Economics and Behavioral Studies
Volume4
Issue number2
Publication statusPublished - Feb 2012
Externally publishedYes

Keywords

  • Credit risk
  • Shareholders’ value
  • Banking sector
  • Loan loss provision
  • Capital adequacy ratio
  • Return on equity

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