Determinants of Commercial Banks' Residual Profitability: An Industry Approach

30 Pages Posted: 18 Jul 2006

See all articles by Borja Amor-Tapia

Borja Amor-Tapia

Universidad de León

Maria T. Tascón

Universidad de León

José L. Fanjul

Universidad de León

Date Written: July 2006

Abstract

This study contrasts the reliability of Abnormal ROE (residual income scaled by beginning-of-period book value of equity) estimates based on value drivers with a contextual approach in the commercial bank industry of the OECD countries. We identify the key theoretical variables from the banking and 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: D4, G12, M4

Suggested Citation

Amor-Tapia, Borja and Tascon, Maria Teresa and Fanjul, José L., Determinants of Commercial Banks' Residual Profitability: An Industry Approach (July 2006). Available at SSRN: https://ssrn.com/abstract=894440 or http://dx.doi.org/10.2139/ssrn.894440

Borja Amor-Tapia (Contact Author)

Universidad de León ( email )

Leon, 24071
Spain
(+34) 987291000 (Phone)

Maria Teresa Tascon

Universidad de León ( email )

Leon, 24071
Spain

José L. Fanjul

Universidad de León ( email )

Leon, 24071
Spain

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