Unveiling the Relationship: Earnings Quality and Income Protection Performance through the Hidden Markov Model in Economic Growth Perspectives

Abstract

Over the past three decades, especially since the recent financial crisis, the volume of academic research analysing banks' efficiency and productivity has grown substantially. The risk-taking behaviour of banks used to be of relatively low interest; however, in recent years, this interest has exploded, especially in regards to its correlation with monetary policy. Measuring credit risk has been and will continue to be a top priority in the banking industry, and the recent global economic crisis has had a direct impact on this process. In this research, the authors of a hidden Markov model-based earnings quality measurement propose and verify its usefulness. Earnings fidelity is a measure of how closely reported earnings correspond to the company's true financial health. The percentage represents the level of accuracy achieved. The impact of earnings management on financial institutions' bottom lines is the focus of this research paper. Within the framework of a Bayesian hierarchical model that allows for cross-sectional heterogeneity, we employ a Markov chain Monte Carlo procedure to estimate the variable in question. The forward earnings response coefficient is positively correlated with earnings fidelity, suggesting a positive relationship between the two.