VIII Międzynarodowe Forum Finansowo-Bankowe The relative value relevance of earnings, book values and cash flows in the Polish banking sector (Warszawa-Jachranka, november 19th, 2015) Piotr Bolibok, PhD The John Paul II Catholic University of Lublin Department of Banking and Finance

Presentation outline Prior research and motivation Research design and data sources Empirical results Conclusions

Prior research and motivation

The relative value relevance of accounting items in banking sector Prior research’ and motivation The relative value relevance of accounting items in banking sector international evidence: earnings are more value relevant than book values: in market-based economies in common law countries under U.S. GAAP book values are more value relevant than earnings: in bank-based economies in code law countries under IFRS cash flows appear to have limited informativeness for equity investors and tend to be significantly less value relevant than earnings lack of direct evidence in the domestic setting (c) Piotr Bolibok

Research design and data sources

Research design and data sources Research hypotheses Hypothesis 1. Book values of equity of banks in the Polish banking sector are more value relevant than net earnings. Hypothesis 2. Net earnings of banks in the Polish banking sector are more value relevant than cash flows. (c) Piotr Bolibok

Research design - methods Research design and data sources Research design - methods 1st Stage: analyses of correlation (Pearson and Spearman) 2nd Stage: simple linear regression: Model 1.: 𝑝 𝑡 = 𝛼 0 + 𝛼 1 ∙ 𝐵𝑉𝑃𝑆 𝑡 + 𝜀 1𝑡 Model 2.: 𝑝 𝑡 = 𝛽 0 + 𝛽 1 ∙ 𝐸𝑃𝑆 𝑡 + 𝜀 2𝑡 Model 3.: 𝑝 𝑡 = 𝛾 0 + 𝛾 1 ∙ 𝑂𝐶𝐹𝑃𝑆 𝑡 + 𝜀 3𝑡 Model 4.: 𝑝 𝑡 = 𝛿 0 + 𝛿 1 ∙ 𝑁𝐶𝐹𝑃𝑆 𝑡 + 𝜀 4𝑡 where: pt – closing price of a bank’s share at the end of period t; α0, β0, γ0, δ0 – intercepts; α1, β1, γ1, δ1– structural parameters (regression coefficients); BVPSt –book value per share at the end of period t, EPSt - net earnings per share for the period (t-1; t), OCFPSt – operating cash flows per share for the period (t-1; t), NCFPSt - net cash flows per share for the period (t-1; t), ε1t, ε2t, ε3t, ε4t – error terms. 3rd Stage: stepwise multiple regression according to the relative explanatory power of particular variables (c) Piotr Bolibok

Research design and data sources research sample: all domestically-based commercial banks listed on the Warsaw Stock Exchange over the period 1997-2014 (18 banks) data sources: financial statements - Notoria Serwis SA database provided by ISI Emerging Markets historical stock prices - the database of the Brokerage House of Bank Ochrony Srodowiska SA the combined data on EPS, BVPS, OCFPS, NCFPS and stock prices yielded the final pooled samples of: 235 bank-year observations for separate financial statements 216 bank-year observations for consolidated financial statements (c) Piotr Bolibok

Empirical results

Empirical results: 1st Stage the strongest (positive) relationship between the selected accounting items and banks’ stock prices was found for BVPS (regardless of the employed correlation measure and type of data used (separate or consolidated) a weaker, yet also strong and statistically significant, positive relationship, was found for EPS in contrast, correlations for cash flows were either insignificant or very weak (consolidated NCFPS) (c) Piotr Bolibok

Empirical results: 1st Stage (c) Piotr Bolibok

Empirical results: 2nd Stage regressions using BVPS and EPS as explanatory variables were statistically significant at the 1% level highest R2 was found for Model 1. (BVPS) followed by Model 2. (EPS) the estimates of regression coefficients for BVPS and EPS were positive and statistically significant the responsiveness of stock prices to changes in EPS was higher than to those of BVPS consolidated data seems to be of slightly higher value relevance to equity investors regressions using cash flows as explanatory variables exhibit a very poor fit to the empirical data (c) Piotr Bolibok

Empirical results: 2nd Stage (c) Piotr Bolibok

Empirical results: 3rd Stage introduction of EPS as an additional explanatory variable to Model 1. provided a relatively small, yet statistically significant, improvement of its predictive power the attempts to enhance the predictive power of the model through introduction of NCFPS and CFOPS proved to be unsuccessful - for each model the estimated change in R2 turned out to be statistically insignificant at the 5% level (c) Piotr Bolibok

Empirical results: 3rd Stage (c) Piotr Bolibok

Conclusions

Conclusions Conclusions book values of equity are more value relevant than net earnings earnings, however, have a statistically significant, incremental explanatory power over book values cash flows (operating and net): are of limited informativeness for equity investors in the banking sector do not exhibit any significant incremental explanatory power over book values and earnings the findings are consistent with the evidence found in the prior literature and support both hypotheses of the study (c) Piotr Bolibok

Thank you… (c) Piotr Bolibok