Does economic policy uncertainty affect bank earnings opacity? Evidence from China

Abstract

Uncertainty about economic policy (EPU) in today's interconnected world and its impact worldwide is more significant than ever before. Thus, this study examines EPU's impact on the bank's earnings opacity of the Chinese banking industry, using the two-step system GMM estimator and the time covering 2011–2018. Our finding shows a negative and statistically significant relationship between EPU and bank earnings opacity, implying that the Chinese banking sector decreases earnings opacity in times of high EPU to earn trust and show good banks’ financial image. Moreover, our finding reveals that the effect of EPU on earnings opacity relies on the banks’ financial strength. This study recommends that a policy to reduce earnings opacity should be in place and also the supervisory capability and financial regulation should be strengthened. Moreover, the regulators should be more vigilant while making economic policies during high economic uncertainties.