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Management quality, M-rating, and bank failures

Authors
  • Sharma, Prateek1
  • 1 University of Minnesota –Duluth, Duluth, USA , Duluth (United States)
Type
Published Article
Journal
SN Business & Economics
Publisher
Springer-Verlag
Publication Date
Jan 24, 2022
Volume
2
Issue
2
Identifiers
DOI: 10.1007/s43546-021-00184-0
Source
Springer Nature
Keywords
Disciplines
  • Original Article
License
Yellow

Abstract

This paper studies bank managements’ role as information producers on borrowers and the effect of management quality on financial reporting quality, and solvency risk. We examine the relation between management quality at banks, measured as abnormal loan loss provisions (LLPs) and abnormal charge-offs, and the management component of CAMELS ratings (M-rating) from bank examinations. We find that banks with higher abnormal LLPs and charge-offs receive a lower M-rating. Alternate definitions and a range of robustness tests support our results. We also find that abnormal LLPs and abnormal charge-offs positively affect the hazard of bank failure. Our study also shows that differences in management quality between failed and a matched sample of non-failed banks were evident up to 4 years prior to failure, indicating that poor management quality is innate to bank failures.

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