The effect of fair valuation on banks' earnings quality: empirical evidence from developed and emerging European countries

Abstract

This study investigates average earnings quality (AEQ) and its determinants in the European banking sector based on data of 409 European banks from the period 2006–2018. We utilize the intensity of fair valuation, average annual interest change, and firm size as explanatory variables for AEQ, with special attention to differences between developed and emerging countries. We split the total time period into a pre-IFRS 13 and a post-IFRS 13 period to examine how the renewed regulation of fair valuation (IFRS 13) has affected the earnings quality of banks. We find that, while the interest change observed in the total period and the banks' size significantly and negatively affect AEQ, the proportion of fair value assets has a significant positive effect. We show that the latter is only valid for developed countries. We find clear evidence that the introduction of IFRS 13 resulted in a measurable improvement in fair value regulation.

Keywords

• Average earnings quality
• Fair valuation
• IFRS
• Developed countries
• Economics
• Finance