Earnings Quality and Performance in the Banking Industry: A Profit Frontier Approach.

51 Pages Posted: 9 Jan 2015

See all articles by Emili Tortosa-Ausina

Emili Tortosa-Ausina

Jaume I University - Department of Economics

Date Written: December 10, 2014

Abstract

The analysis of efficiency and productivity in banking has received a great deal of attention for almost three decades now. However, most of the literature to date has not explicitly accounted for risk when measuring efficiency. We propose an analysis of profit efficiency taking into account how the inclusion of a variety of bank risk measures might bias efficiency scores. Our measures of risk are partly inspired by the literature on earnings management and earnings quality, keeping in mind that loan loss provisions, as a generally accepted proxy for risk, can be adjusted to manage earnings and regulatory capital. We also consider some variants of traditional models of profit efficiency where different regimes are stipulated so that financial institutions can be evaluated in different dimensions — i.e., prices, quantities, or prices and quantities simultaneously. We perform this analysis on the Spanish banking industry, whose institutions have been deeply affected by the current international financial crisis, and where re-regulation is taking place. Our results can be explored in multiple dimensions but, in general, they indicate that the impact of earnings management on profit efficiency is of less magnitude than what might a priori be expected, and that on the whole, savings banks have performed less well than commercial banks. However, savings banks are adapting to the new regulatory scenario and rapidly catching up with commercial banks, especially in some dimensions of performance.

Keywords: bank, efficiency, loan loss provision, profit, risk

JEL Classification: C14, C61, G21, L50

Suggested Citation

Tortosa-Ausina, Emili, Earnings Quality and Performance in the Banking Industry: A Profit Frontier Approach. (December 10, 2014). Available at SSRN: https://ssrn.com/abstract=2539107 or http://dx.doi.org/10.2139/ssrn.2539107

Emili Tortosa-Ausina (Contact Author)

Jaume I University - Department of Economics ( email )

Campus del Riu Sec.
E-12071 Castellon
Spain

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