*4.1. GMM Results*

In this section, the results are discussed according to the literature review and the formulated hypotheses.

Table 2 presents the main descriptive statistics (mean, standard deviation, minimum and maximum) of the variables used in this study.


**Table 2.** Summary of statistics.

The results of the estimation model are presented using a two-step dynamic panel with equations at levels. The data used are from 19 Eurozone banks for which information is available between 2011 and 2016. The resultant unbalanced panel comprises 94 banks.

Table 3 summarizes the empirical results for the profitability measure used, ROAA.


**Table 3.** Estimation results of the model (1).

The variables are defined in Table 1. The remaining information needed to read this table is as follows: (i) Heteroscedasticity consistent asymptotic standard error in parentheses; (ii) \*, \*\*, and \*\*\* indicates significance levels at 10%, 5%, and 1% respectively; (iii) The Sargan test with a *p value* greater than 5% shows that the instruments are valid, and the values in parentheses of the test represent degrees of freedom; (iv) The Wald test has a *p value* less than 5% which means that the joint significance and the coefficients are significant distributed asymptotically as χ2 under a null hypothesis without significance, with degrees of freedom in parentheses. The table shows that there is no first or second-order correlation problem in the model see AR (1) and AR (2).

As expected, the negative and significant coefficient of the cost-to-income ratio shows that poor expenses managemen<sup>t</sup> is one of the main contributors to poor profitability performance. This evidence corroborates Hypothesis 3 following, for example, Guru et al. (2002), Garcia and Guerreiro (2016), among others.

As we can see in the table, bank size is negatively related to profitability based on the view that the higher the number of employees, the higher the salary of the bank and, therefore, the lower its operating profitability. For example, García-Herrero et al. (2009) sugges<sup>t</sup> that higher bank profitability could lead to more employees and less efficiency.

The results obtained are not surprising especially taking into account that the sample is characterized, in general, by being a civil law system. In fact, in the bank-based system, the economy is predominantly financed by banks, and in our sample period, the regulatory environment changed because the Eurozone was affected by the global financial crisis and the sovereign debt crisis. Under an ever-changing environment, and new rules of Basel III Risk Agreement, banks have to reinvent themselves to improve their profitability; therefore, in this context, it seems natural that bank managemen<sup>t</sup> should use all the synergies taking advantage of economies of scale. For this reason, it is not surprising that the variables related to bank costs are the most significant in the model.
