A literiture review on earnings quality of commercial banks with proxies derived from relation between earnings and cashflow

Abstract

High quality accounting information plays an important role in minimizing information asymmetry and

pushing up the development of the financial markets. For banking industry, information disclosure also

enhances market discipline- one of three pillars in banking supervision. Among accounting information

disclosed, earnings or net income is the most important and synthetic item. Thus, earnings quality is an

important branch in accounting quality research. But how to measure and evaluate earnings quality of

financial institutions? Previous papers on earnings quality of banks focus much on detecting loan loss

provision manipulation due to the important role of this accrual in the industry. This leads to a fact that one

common group of earnings quality proxies- proxies derived from relation between cash and earnings- has

been neglected. This paper discusses on how to evaluate earnings quality based on relation between cash

and earnings; provides a literature review on this issue and determines the direction for future researches