Persistence and value relevance of commercial banks’ earnings components in different interest rates environments
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School of Business | Master's thesis
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AbstractRESEARH OBJECTIVES The objective of this study is to examine the two attributes of earnings value relevance, which in this study are persistence and value relevance as indicating the earnings explanatory power to explain the market value together with book value. Due to the most recent data and wide data sample this study is able to contribute to the literature about earnings components persistence and value relevance. The major impetus of this study is to examine, whether the value relevance and persistence of earnings and its components vary in different interest rate environments as in low and high interest rate environments and whether the connection between earnings persistence and value relevance change accordingly. Declining Euribor rates have impacted banks' earning components. Interest income has decreased and banks have balanced the decrease by accumulating earnings more with non-interest income. In accordance changing interest rates can significantly impact earnings and their persistence and value relevance. DATA AND METHODOLOGY The data used in this study is retrieved from Thomson Reuters Eikon. The data is from years 2003-2016 and comprises total 396 observations of Eurozone commercial banks. The methodology in this study is OLS regression analysis, which is used to examine persistence and value relevance of earnings and its components. FINDINGS This study succeeds to find the evidence that the persistence and value relevance of earnings components varies according to high and low interest rate environment. The results showed that earnings value relevance weakened significantly after the financial crisis period. Significantly, value relevance of interest income declined, even its persistence got stronger proving the weaker connection between the persistence and value relevance after the financial crisis. However, value relevance of non-interest income was aligned with its persistence on both periods. On average, the non-interest income was more value relevant and persistent than interest income during 2003-2016.
Thesis advisorMyllymäki, Emma-Riikka
earnings, earnings components, interest income, non-interest income, persistence, value relevance, interest rate environments, commercial banks