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Earnings quality and performance in the banking industry: A profit frontier approach

Emili Tortosa-Ausina () and Diego Prior ()
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Emili Tortosa-Ausina: Universitat Jaume I and Ivie

No 1405, Working Papers from Departament Empresa, Universitat Autònoma de Barcelona

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 managemen t and earnings quality, keeping in mind that loan loss provisions, as a generally accepted proxy for risk, can be adjusted to manage earn-ings 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 prioribe expected, and that on the hole, 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 (search for similar items in EconPapers)
JEL-codes: C14 C61 G21 L50 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-eff
Date: 2014-11, Revised 2014-11
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Published in Working Papers at the Department of Business, December, pages 1-51

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