Determinants of Commercial Banks' Residual Profitability: An Industry Approach
Spanish Journal of Finance and Accounting, Vol. 37, No. 139, pp. 469-500, September 2008
Posted: 27 Jul 2009 Last revised: 27 Sep 2009
Date Written: July 27, 2008
Abstract
Using a contextual approach on a sample of commercial banks from the OECD countries, this study identifies some drivers of abnormal ROE (residual income scaled by beginning-of-period book value of equity). We select the key theoretical variables from the banking and the accounting literature and analyze the impact on the prediction of future abnormal ROEs. After regressing the following year's abnormal ROE on those variables, we verify that some of them, related to the competitiveness of banks and the accounting system, play a determinant role. Our evidence suggests that the identification of ‘other information’ factors, by a contextual approach, might improve the empirical use of the Ohlson Model in commercial banks, especially when they act in competitive environments and/or relevant intangibles are not captured by accounting.
Keywords: residual income model, abnormal earnings, equity valuation, contextual approach, financial firms
JEL Classification: D40, G12, M40, G24
Suggested Citation: Suggested Citation