An empirical evaluation of selected accounting-based value drivers in the Polish banking sector

Abstract

The paper aims at empirical evaluation of selected accounting-based value drivers in the Polish banking sector. Using the analyses of correlation and regression, the study investigates the associations between banks' charter values, proxied by Tobin's Q, and a set of explanatory variables including size, operating efficiency, profitability, net cash flow generation capacity, leverage, asset liquidity, and risk management efficiency, each proxied by a measure based on the data available in the annual financial reports of banks. The examined sample covered all domestically-based banks listed on the Warsaw Stock Exchange over the period 1997-2014. The empirical evidence indicates a statistically significant positive impact of operating efficiency, profitability and risk management efficiency on charter values. In turn, the influence of size and leverage, although also positive, appears to be so weak, that it becomes irrelevant when combined with other explanatory variables. Additionally, no statistically significant impact was found for net cash flow generation capacity nor asset liquidity. The above findings suggest that equity investors in the Polish banking sector perceive performance and risk management efficiency as the key value drivers, practically neglecting the issues related to banks' financial stability like the liquidity of assets or degree of leverage, thus presumably relying on the too-big-to-fail principle.

The Role of Accounting Variables in Valuation of Banks

“…Also a survey of European banks conducted by ECB [2010] revealed that proprietary valuation models used by the banks for their own purposes are based mostly on multi-stage discounted dividends or cash-flow models applied to different business lines. The empirical evidence also suggests that bank market values are driven by the relative performance measures, including ROA and ROE [Strumickas, Valančienė 2006;Bolibok 2016] and their components capturing the performance of the core banking activity [Chiou et al 2014].…”

“…As the value of banks is inherently dependent on the quality of their assets and risk management efficiency, numerous studies document a negative impact of impairment provisions on bank values [Strumickas and Valančienė 2006;Chiou et al 2014;CFA Institute 2014;Bolibok 2016]. In addition, Chiou et al [2014] find that larger banks are punished more severely by the capital markets for the asset impairment.…”