EARNINGS’ QUALITY OF PUBLIC BANKS IN KENYA: EVIDENCE FROM PERSISTENCE OF EARNINGS

Abstract

This longitudinal empirical survey, which covers the 12 year period of january 2001 to december 2012, examines the persistence of earnings among commercial banks in kenya. It tests two null hypotheses first that earnings among banks are not transitory over time and second that there is no significant difference between the earnings persistence of size based portfolio quartiles. The persistence of earnings of size-based portfolio quartiles is measured by obtaining the coefficient of the autoregressive model of order one of current common size earnings against one financial period lagged common size earnings. The study fails to reject the first null hypothesis for all the size portfolios and finds that the earnings of commercial banks are not transitory and are therefore of a high quality. It however rejects the second null hypothesis and finds that the large size commercial banks have higher persistence coefficients than the small size commercial banks. The findings suggest that the investors in a kenyan commercial bank can have access to highly predictable earnings data given the high quality of financial reporting by the banks. On the flipside however, the large commercial banks seem to have relatively better quality earnings data than the small commercial banks. The results are however limited by the small size of the commercial banking sector in kenya which limits the opportunities available for the assessment of earnings’ quality inherent in financial reports.