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Effect of Earnings Quality on Operational Efficiency of Commercial Banks in Kenya

Author

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  • Jedidah Wanjagi
  • Tabitha Nasieku
  • Olanrewaju Fatoki

Abstract

Purpose: This research examines the effect of earnings quality on the operational efficiency of commercial banks in Kenya, emphasizing its critical role in financial stability and risk management. A two-step analytical framework was employed: initially, Stochastic Frontier Analysis (SFA) was used to compute the operational efficiency scores for each bank. Subsequently, a panel Generalized Method of Moments (GMM) regression model was applied to explore the relationship between these efficiency scores and capital adequacy. Methodology: The study utilized a panel Generalized Method of Moments (GMM) approach, addressing individual and time-specific effects, endogeneity, and correlation biases. It focused on data from 2008 to 2022, covering a 14-year period. The data was sourced from verified audited financial statements provided by the Central Bank of Kenya and the websites of the respective banks Findings: The findings indicate a positive relationship between earnings quality and operational efficiency, with a 4% improvement in operational efficiency linked to an increase in capital adequacy. Additionally, the study highlights the significant role of market structure in this relationship. Unique Contribution to Theory, Practice and Policy: This research contributes to agency theory by demonstrating how the selection of financial instruments can promote financial discipline within banks. Based on these results, it is recommended that policymakers implement comprehensive strategies emphasizing stringent earnings quality regulations to enhance bank performance and stability.

Suggested Citation

  • Jedidah Wanjagi & Tabitha Nasieku & Olanrewaju Fatoki, 2024. "Effect of Earnings Quality on Operational Efficiency of Commercial Banks in Kenya," International Journal of Finance and Accounting, IPRJB, vol. 9(5), pages 7-19.
    • Handle: RePEc:bdu:ojijfa:v:9:y:2024:i:5:p:7-19:id:3050
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    File URL: https://www.iprjb.org/journals/index.php/IJFA/article/view/3050/3603
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