Bank Competition and Firms’ Financial Reporting Quality: Evidence from a Bank-Based Economy

We empirically investigate the impact of bank competition on corporate financial reporting quality. Using data from Vietnam for the period 2007 to 2023, we reveal a significant association between increased bank competition and firms’ better information disclosure. Specifically, heightened competition prompts firm managers to curtail upward earnings management practices. Our channel analysis highlights the alleviation of financial constraints as a key mechanism driving this relationship. Furthermore, heterogeneity tests reveal that the impact of bank competition is less pronounced for firms with strong bank-firm relationships, while smaller firms, non-state-owned entities, and those with limited market power exhibit greater responsiveness to bank competition in terms of manipulating financial reporting. Besides, our findings also suggest that the influence of bank competition on earnings manipulation is more pronounced during unfavorable economic conditions, underscoring the importance of financing constraints in shaping firms’ financial reporting practices under competitive banking environments.