Bank Earnings Opacity: Does Digital Transformation Matter?

This paper explores the effects of digital transformation on bank earnings opacity using a panel dataset of Vietnamese commercial banks from 2008 to 2022. Our findings reveal that overall digital transformation and its components significantly reduce the magnitude of discretionary loan loss provisions, highlighting the role of digitalization in curbing bank earnings opacity, particularly income-increasing management practices. Mechanism tests indicate that this reduction is mediated by increased profitability and enhanced market power of banks, which are outcomes of digital transformation. Additionally, our heterogeneity analysis shows that the impact of digital transformation on reducing earnings opacity is less pronounced in banks with greater financial strength and higher market positions, such as those with larger capital reserves, higher liquidity, lower credit risk, state ownership, and listing status. Our findings underscore the significance of promoting digital transformation across the banking sector, with a particular focus on supporting weaker banks to enhance financial transparency.