Impact of financial reporting quality on bank systemic risk across G7 countries: the moderating role of varying economic conditions

Although prior research has not fully explored how poor financial reporting quality (FRQ) contributes to risk transmission across borders, especially within the interconnected financial systems of the Group of Seven (G7), and lacks a comprehensive perspective on how varying economic conditions influence this relationship since the introduction of the Sarbanes-Oxley Act (SOX). Thus, this study aims to examine the association between FRQ and systemic risk among 61 large cross-national listed banks, ranked by market capitalization, in the aforesaid region over an extended period from 2002 to 2021, considering the moderating effects of different economic conditions. To address endogeneity bias, the study employs the two-step system Generalized Method of Moments (GMM) approach. Findings indicate that lower FRQ (higher earnings management) is associated with higher systemic risk throughout the sample period. This relationship is further strengthened during periods of economic policy uncertainty (EPU), crisis, and pandemic, with statistically significant interaction terms of +0.068, +0.120, and +0.127, respectively, across the baseline model. However, this association varies over time. During the pre- and post-crisis periods, lower FRQ (higher earnings management) is modestly associated with lower systemic risk, with statistically significant interaction terms of −0.583 and −0.215, respectively, across the baseline model, suggesting that higher transparency has a disruptive influence under stable market conditions. These findings depict that the association between FRQ and systemic risk is dynamic and context-dependent. Policymakers can utilize these insights to mitigate systemic risk by promoting improved financial reporting, especially during periods of economic stress. Future research could extend this analysis to non-bank financial institutions or cross-sector samples to examine whether similar crisis-contingent dynamics hold.