Policy uncertainty and earnings quality in banks: the role of institutional quality in emerging markets

Abstract

Purpose

This paper aims to explore the relationship between economic policy uncertainty (EPU) and earnings quality in banks in the context of Brazil, Russia, India and China (BRIC) as an emerging economic bloc. The study further explores the role of institutional quality in moderating the impact of EPU on bank earnings quality.

Design/methodology/approach

The study has used earnings management (EM) as a proxy for earnings quality, measured using discretionary loan loss provisions. The higher the EM, the lower the quality of earnings. The study has collected data from 74 banks spanning the years 2014 to 2020 and used fixed effects (FE) and generalized methods of moments (GMM) estimators to test the hypotheses.

Findings

The study has found a positive impact of EPU on EM, suggesting that banks in the BRIC region react to EPU by increasing earnings opacity. However, the study found that better institutional quality can reduce the EM in the presence of EPU.

Originality/value

The study has made an early attempt to establish the relationship between bank EM and EPU in a cross-country setting. In addition, the study shows that the level of institutional quality in emerging markets moderates the impact of EPU on bank EM, which remains unexplored in prior research.

Citation

Biswas, S., Saikia, A. and Bhattacharya, M. (2025), "Policy uncertainty and earnings quality in banks: the role of institutional quality in emerging markets", Accounting Research Journal, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/ARJ-02-2024-0066