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Ability of accounting and audit quality variables to predict bank failure during the financial crisis

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  • Jin, Justin Yiqiang
  • Kanagaretnam, Kiridaran
  • Lobo, Gerald J.
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    Abstract

    We examine the ability of selected accounting and audit quality variables measured in a period prior to the financial crisis (i.e., the four quarters of 2006), to predict banks that subsequently failed during the financial crisis. We employ two sets of samples from the US: a troubled banks sample that includes banks that failed in or after 2007 as well as banks classified as being troubled based on profitability, loan quality, and balance sheet position in 2007, and a full sample that includes all banks with available required data. Using the troubled banks sample, we identify six reliable predictors of bank failure: auditor type, auditor industry specialization, Tier 1 capital ratio, proportion of securitized loans, growth in loans, and loan mix. For the larger full sample of banks, we identify the following ten predictors of bank failure: auditor type, Tier 1 capital ratio, proportion of securitized loans, nonperforming loans, loan loss provisions, growth in commercial loans, growth in real estate loans, growth in overall loans, loan mix, and whether the bank is a public bank.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 11 (November)
    Pages: 2811-2819

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:11:p:2811-2819

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Bank failure Troubled banks Audit quality Loan quality Loan loss provisions Financial crisis Auditor reputation;

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    1. Demyanyk, Yuliya & Hasan, Iftekhar, 2010. "Financial crises and bank failures: A review of prediction methods," Omega, Elsevier, Elsevier, vol. 38(5), pages 315-324, October.
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    14. Kanagaretnam, Kiridaran & Lim, Chee Yeow & Lobo, Gerald J., 2010. "Auditor reputation and earnings management: International evidence from the banking industry," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(10), pages 2318-2327, October.
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    Cited by:
    1. Fiordelisi, Franco & Mare, Davide Salvatore, 2013. "Probability of default and efficiency in cooperative banking," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 26(C), pages 30-45.
    2. Dahl, Drew, 2013. "Bank audit practices and loan loss provisioning," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(9), pages 3577-3584.
    3. Calice, Pietro, 2014. "Predicting bank insolvency in the Middle East and North Africa," Policy Research Working Paper Series 6969, The World Bank.
    4. Jin, Justin Yiqiang & Kanagaretnam, Kiridaran & Lobo, Gerald J. & Mathieu, Robert, 2013. "Impact of FDICIA internal controls on bank risk taking," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(2), pages 614-624.
    5. Maghyereh, Aktham I. & Awartani, Basel, 2014. "Bank distress prediction: Empirical evidence from the Gulf Cooperation Council countries," Research in International Business and Finance, Elsevier, Elsevier, vol. 30(C), pages 126-147.
    6. Oudam Toeung, 2013. "Investor sophistication and earnings management during economic crisis: evidence from the banking industry," Post-Print dumas-00934329, HAL.
    7. Cornett, Marcia Millon & Li, Lei & Tehranian, Hassan, 2013. "The performance of banks around the receipt and repayment of TARP funds: Over-achievers versus under-achievers," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(3), pages 730-746.
    8. Vincent Bouvatier & Michael Brei & Xi Yang, 2014. "Bank Failures and the Source of Strength Doctrine," EconomiX Working Papers 2014-15, University of Paris West - Nanterre la Défense, EconomiX.
    9. Hoffmann, Arvid O.I. & Post, Thomas & Pennings, Joost M.E., 2013. "Individual investor perceptions and behavior during the financial crisis," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(1), pages 60-74.
    10. Hossain, Mahmud & Jain, Pankaj K. & Mitra, Santanu, 2013. "State ownership and bank equity in the Asia-Pacific region," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 21(1), pages 914-931.

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