Authors: Chris Magnis, George Iatridis

Title: The Relation between Earnings Quality and Default Risk in the Banking Sector. Evidence from 6 Countries.

Abstract

We study the influence of the financial crisis both on earnings quality and on default risk in the banking industry. Using a sample of listed banks from 6 countries (USA, UK, Canada, France, Germany and Italy) between the years 2005 to 2012 and abnormal loan loss provisions (ALLP) as well as z-score as our main proxies for earnings quality and default risk, we document that banks, in after financial crisis period, tend to display higher earnings quality and lower default risk in comparison with the period before this crisis. The findings also demonstrate a negative and strong association between earnings quality and default risk both periods, before and after the financial crisis.