Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Leverage Model

50 Pages Posted: 15 Jan 2001

See all articles by Robert DeYoung

Robert DeYoung

University of Kansas School of Business

Karin P. Roland

Valdosta State University - Department of Accounting and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 21, 2001

Abstract

We construct a degree-of-total-leverage framework to test whether and how shifts in product mix affect earnings volatility at 472 U.S. commercial banks between 1988 and 1995. Our framework, which accounts for cost and revenue synergies not captured in most previous studies, conceptually links earnings volatility to revenue volatility, expense fixity, and product mix. We find that replacing traditional lending activities with fee-based activities - an ongoing trend that may be strengthened by recent financial modernization - is associated with both higher revenue volatility and higher total leverage, which in this framework implies higher earnings volatility.

Keywords: Commercial banks, degree of total leverage, earnings volatility, fee-based actitivities, product mix

JEL Classification: G21, G32, D24.

Suggested Citation

DeYoung, Robert and Roland, Karin P., Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Leverage Model (March 21, 2001). FRB Chicago Working Paper No. 1999-06. Available at SSRN: https://ssrn.com/abstract=251356 or http://dx.doi.org/10.2139/ssrn.251356

Robert DeYoung (Contact Author)

University of Kansas School of Business ( email )

Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States
785-864-1806 (Phone)

Karin P. Roland

Valdosta State University - Department of Accounting and Finance ( email )

College of Business Administration
Valdosta, GA 31698
United States
912-333-5967 (Phone)
912-245-6498 (Fax)

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