The Dynamic Effect of Bank Size on Earnings Volatility in Iranian Banking System

Abstract

The importance of earnings volatility in banking system has long been accepted in the accounting and finance literature. Earnings volatility has an effect either through its relation to the discount rate or expected cash flows (earnings) in assessment models. Most of the studies have been focused on the relationship between cost of capital and earnings volatility. One established result is a positive relationship between earnings volatility and different measures in cost of capital. (J Money Credit Banking 29:300–313, 1997) state that large banks have more risky revenues than small banks; therefore, the degree of risky revenues is linked to bank size and type of bank. For this reason, we use Herfindahl-Hirshman index (HHI) and dummy variables for different types of banks in order to examine the relationship between earnings volatility and bank size in Iran. We find that bank size is negatively related to earnings volatility; therefore, larger banks have lower earnings volatility compared to smaller banks. We use dummy variables in order to consider the relationship between bank type and earnings volatility. We identify different results according to different types of banks because state banks and specialized banks have positive impact on earnings volatility, while private and privatized banks have negative effects on earnings volatility. Therefore, state banks and specialized banks have more risky revenues, while private and privatized banks have less risky revenues.