The Value Relevance Variation of Capital Stocks and Earnings Quality: Potential of Banking Analogy.

Abstract

Banks regulations manage to enhance understanding of key supervisory issues, and improve the quality of banking supervision worldwide. Financial crisis over the past decades had built challenges to the banks and regulators, where they need to optimally manage the risks of credit, market and operations. The earnings quality of the banks are considered a significant variable to follow and analyze to present how far this earnings quality is changing as to be improved, and to protect banks against any risk management failure and loss. This paper examines the association between the banks’ earnings quality and the value relevance variation of banks capital stocks at a time period for a purposive sample of number of international banks, in order to show what is expected in the future for the banks regulations and earnings quality, based on what is currently analyzed in the banking industry. Measuring earnings quality for the purpose of analysis in this paper requires the measure of the changes in earnings quality variables, as an indication for the association between banks' earnings quality and the value relevance variation of capital stocks in the banking sector. This paper answers a main question of: Is the international banking sector currently efficient enough to warrant high earnings quality, and consequently affects the value relevance variation of capital stocks in banks? This is significantly helpful to measure the proper improvements in the economies and the anticipations for the future protection for the banks financial position and operations and their markets. For the current stage of this paper, regression analysis is optimal to apply for the analysis and interpretations by building a model that is proper to examining the value relevance variation of capital stocks in relation to earnings quality. I find that the change in non-interest income, and the change in the weight assigned to operational risk are positively associated with the value relevance variation of capital stocks in banks, and the estimation of fair value for liabilities is negatively associated with the value relevance variation of capital stock at a significance level of 0.10, this represent the significance of the three variables to be considered in banks for future sustainability and profitability, whereas the statistical inference shows for this regression model a high explanatory power to predict this significant association. This paper has a major limitation in respect to the size of the sample of banks used in the regression model, but has an optimistic vision about what the analysis will represent for the current and the future stages of banking analogy in this regard for the purpose of sustaining future protection in the banking sectors and the future economies for future generations. Thus, future research can find a useful trend to generalize the findings by expanding more empirical methodologies.