Profit persistence in emerging markets: empirical evidence from Indian banking sector

Abstract

The purpose of the current paper is to examine the incidence of profit persistence among Indian banks. The study also aims at analysing the dynamic relationship between firm wide factors and profitability in the Indian Banking Industry. Advance dynamic panel models have been deployed to estimate the relationship between various bank-wide factors and performance. The Arellano and Bond (1991) and Blundell and Bond (1998) estimation techniques have been used to generate the results. A sample of 51 banks operating in India during the period 2005-2013 has been considered. The results confirm incidence of positive profit persistence among Indian banks. The results are also robust while utilising two different measures of profitability including return on assets and net profit margin. The results also display that, government ownership, lending to sensitive sectors, and non-performing assets are negatively associated with profitability. On the other hand fund-based income, and tier-two capital adequacy ratio is positively associated with profitability. The results lend support to resource-based view and indicate that banks create valuable resources to sustain their competitive advantage.