Earnings quality and external governance on banks: empirical evidence in the European context

Abstract

This paper examines the relationship between external governance exerted by the national supervision and bank earnings quality, specifically earnings persistence and cash flow predictability. To test the predictions, multivariate regressions are carried out on a panel dataset of 4,443 bank-year observations from the European Union across the 2005-2014 timeframe. Results show that higher supervisory power, independence and greater stringency of capital regulation are associated to higher persistence of reported earnings. Additionally, banks under strict supervisory regimes, independent authorities and stricter capital regulation exhibit earnings that are better predictors of future cash flows. This paper has policy implications for the ongoing European debate concerning advantages and disadvantages of the new Single Supervisory Mechanisms, with specific reference to the influence of the national authorities' characteristics on bank transparency. The findings suggest indeed to adequately consider the effects of national supervisory styles on accounting quality.