Microeconomic And Macroeconomic Factors: Determinants Of Earnings And Earnings Quality In Banks Of Pakistan

The maintheme of this thesis was to investigate the macro and microeconomic determinant of earnings and earnings quality in the banks of Pakistan. Specifically the focus was on profitability and two earning quality attributes; accounting conservatism and earnings persistence. The analysis used balance panel data from 32 banks of Pakistan over the period 2006 to 2012.Applying the linear regression, banks profitability was assessed by using fixed effect model in fixed framework. The microeconomic variables used in the study are investment to assets, bank size, and cash flow from operation and funding cost. Macroeconomic variables are GDP, interest and financial crisis. The findings clearly show that both micro and macroeconomic factors are very important in analyzing profitability of banks in this study.In assessing accounting conservatism, characteristics of earnings quality, the most famous Ball and Shiva Kumar(2005) model was used. The macroeconomic factors used in this study are financial crisis, GDP, inflation and interest. The findings show that these variables are affecting the level of accounting conservatism in our study.In estimating earnings persistence, Freeman et al(1982) model is used. The microeconomic factors used in this study are banks size and funding cost with macroeconomic variables financial crisis, GDP, inflation and interest. The findings show that these variables are significantly affecting the earning persistence in banks of Pakistan.The findings validate the significance of both micro and macroeconomic factors in enlightening the determinant of earnings and earnings quality in banks of Pakistan. The policy implication drained from this thesis are that if banks want to improve their earnings and earnings quality, both bank level as well as macroeconomic factors are very important to be considered.