Accrual Quality Assessment Model in Banking Industry

This paper provides a new categorization of balance sheet items for commercial banks by putting them in to financial and operational parts. Results of the study shows that banks with higher net financial assets compared to net operational assets have less incentives for earnings management, which results in higher accruals quality. Furthermore, we have studied the role of loan contract types and capital adequacy on accruals quality. The results show that banks with higher share of fixed-income loan contracts and higher capital adequacy ratio have a better quality of accruals. We also found out that banks which give loans to corporations of leading industries, have less earning management actions, which leads to higher accruals quality. Based on this finding, we have developed a future-looking measure of accruals quality for banks focused on industries which banks put higher portion of the loans on and called it Portfolio Quality Index (PQI).