Most studies in literature focus on using information contained in accounting accruals about earnings quality to predict equity returns. However, these have been little evidence using accounting accrual information with bank spread behavior to predict bank default risk in equity returns. To fill this gap, this paper proposes a Merton-Type banking firm model to determine the optimal bank interest margin, explicitly incorporating information about accounting accruals in the return to retail banking environment. We show that an increase in the optimal bank interest margin accompanied by higher accruals suggests lower default risk in equity returns.
ICIC Express Letters: An International Journal of Research and Surveys 7(7), pp.2093-2098