Corporate disclosures and financial distress in banks in India: the moderating role of competition

Abstract

Purpose

This study aims to determine the association of Transparency and Disclosure (TD) with financial distress (FID) while the competition (as Lerner Index) moderates the association between the two.

Design/methodology/approach

The panel data analysis (static model) is performed to examine the effect of disclosures on the bank's FID. A TD index is built to assess the level of TD. All three versions of Altman's Zscore are employed to measure a bank's FID (High Zscore is opposite of FID). The data of 34 banks running in India for the timeframe 2015–16 to 2018–19 is utilized. Lerner index (LI) is taken as the moderator. The bank-size, valuation and financial leverage are control variables.

Findings

There exists no linear connection between TD and FID. However, TD is positively associated with financial stability (opposite FID). It means TD initially reduces financial stability and improves it after TD crosses a threshold level. Competition (as LI, where the higher value of LI means reduced competition) negatively moderates the association of TD with financial stability. Hence, the findings of this study support the competition-fragility premise. Surprisingly, the negatively significant interaction term of LI and TD implies either high competition and high TD or low competition with low TD, which helps in the bank's financial stability.

Originality/value

The findings provide input to a long-term policy of disclosures and competition in the banking sector, keeping in view the financial stability of the banks. Therefore, findings are novel and carry immense value to the existing knowledge on the topic.

Citation

Rastogi, S. and Kanoujiya, J. (2022), "Corporate disclosures and financial distress in banks in India: the moderating role of competition", Asian Review of Accounting, Vol. 30 No. 5, pp. 691-712. https://doi.org/10.1108/ARA-03-2022-0064