Does uncertainty in the banking sector slow down corporate performance?

Abstract

AbstractThe paper explores the effects of banking uncertainty on corporate performance. Utilizing data from 2007 to 2022 in Vietnam and a comprehensive methodology to assess the performance of the sampled firms, our analysis reveals a detrimental impact of banking uncertainty on firm performance. Specifically, heightened uncertainty leads to diminished profitability ratios, reduced operational efficiency, constrained growth potential, and a decline in market valuation for firms. Our findings also indicate that firms may accumulate higher levels of liquidity in response to amplified uncertainty. Additionally, the subdued performance of firms attributable to banking uncertainty is more pronounced among those burdened with elevated bank debts. Interestingly, while the average impact of banking uncertainty on firm performance appears to be weak as a whole, this impact becomes notably magnified for firms maintaining greater credit relationships with banks. Our results are robust to different model specifications, variables, and subsamples. Overall, we provide evidence that banking uncertainty has important implications for corporate performance.