How Well do Accounting-Based Risk Measures Predict Bank Failure and Bank Financial Trouble? Evidence from the Recent Financial Crisis

• In Event: International/ Governmental/ Informations Systems

Abstract

We examine the relation between selected accounting-based risk measures and bank failure and financial trouble for a sample of banks from 60 countries. Using three pre-financial-crisis-period, accounting-based summary risk measures, we find a positive relation between these measures and bank failure and financial trouble during the financial crisis. We also study whether the ability of accounting-based risk measures to predict bank failure and financial trouble varies systematically with three characteristics of the institutional environment. We find that the ability of accounting-based risk measures to predict bank failure and financial trouble increases with the strength of the legal, extra-legal and political system. Overall, our study documents that accounting-based measures have not lost their relevance in predicting bank failure and financial trouble.

Authors

• Kiridaran Kanagaretnam, McMaster University

• Lim Chee Yeow, Singapore Management University

• Gerald Lobo, University of Houston