Corruption-related disclosure in the banking industry: evidence from GIPSI countries

Abstract

This paper empirically investigates corruption-related disclosure in the banking industry, aiming to shed light on the reasons why financial institutions disclose corruption-related information in their annual financial reports. Using a total sample of 88 banks from the GIPSI countries during the period 2011-2019, our results reveal that, on average, banks involved in corruption issues disclose less on corruption-related matters than banks not involved in any corruption scandal. Moreover, banks not involved in corruption cases disclose even more information after other banks’ corruption events become public. These basic relationships, however, are shaped by the characteristics of each particular country in terms of control of corruption and the specific regulation on non-traditional banking activities. Our results are robust to different specifications of econometric models, to alternative empirical methods accounting for potential reverse causality and sample selection concerns and to the inclusion of internal corporate governance mechanisms.

KEYWORDS:

• Corruption
• disclosure
• banking
• GIPSI
• institutional quality
• regulation

JEL CODES:

• G2
• G21
• G28
• G39

Acknowledgement

We gratefully acknowledge the valuable support provided by Y. Altunbas, L. Arranz-Aperte, G. Avignone, R. Correia, D. Conte and A. Reghezza. We also acknowledge participants at the EUMODFRAUD Final Conference (Porto), at the XXX ACEDE Conference (Cartagena), at the 2021 Wolpertinger Conference (Cracow), and at the 14th IRMC Conference (Cagliari), the two anonymous referees and the Editor. This research benefited from the Professorship Excellence Program in accordance with the multi-year agreement signed by the Government of Madrid and the Autonoma University of Madrid (Line #3). We acknowledge financial support from the EU PROJECT H2020 and Hercules III Program (HERCULE-2019-LT-AG). P. de Andrés, E. Scannella and N. Suárez acknowledge financial support from the Spanish Ministry of Economy and Competitiveness (Project PID2020-118064GB-I00). S. Polizzi and N. Suárez acknowledge financial support from the Comunidad de Madrid Research Project for Young Researchers (SI3-PJI-2021-00276). This paper has been awarded with the Best Paper in Financial Economics – Valentín Azofra of the XXX ACEDE Conference’s award.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Available at: http://en.rsf.org/press-freedom-index-2011-2012,1043.html

2 Notice that there could be several strategies used after a legitimacy threatening event that are compatible with legitimacy theory. As different banks can use different strategies, the consideration of bank-level fixed effects is needed.

3 We focus on some of the most relevant and trustworthy economic, business and financial newspapers at European level (Reuters, Financial Times, The Economist, City A.M., Il Sole24Ore, Milano Finanza and Expansión).

4 The natural logarithm of total assets in the balance sheet is used as a proxy for bank size. The net interest margin is considered to proxy for the level of bank profitability. The ratio total customer deposits over total funding is used as a proxy for the amount of deposits.

5 For further information on the optimal sample size for treatment and control groups in case control studies, see Santis, Pacifico, and Sambucini (2004). The list of banks included in our sample is provided on Table A1 in the appendix A.

6 As reported in Table 1, over 50% of the sample of bank-year observations are from Italy. We also ran our baseline models without the subsample of Italian banks and found that our results held completely. This allowed confirming that our results are not driven by this relatively higher presence of Italian banks in our sample.

7 The main dictionary has been created in English. Additionally, for those banks whose reports were not available in English, we created a dictionary in Italian and in Spanish.

8 This panel of experts includes academic scholars and practitioners in the field of banking. They have worked in studies on disclosure, CSR and corruption in banking.

9 In our sample, we consider the value of the index in 2011.

10 As the baseline regressions are ran using a mixed-effects estimator and it considers individual bank-fixed effects $\left({\eta }_i\right)$, we have not included the individual term CORRUT in equation [3]. In further robustness tests, we define different specifications of the econometric model and use different estimators in order to account for the individual impact of the CORRUPT dummy. The results obtained hold completely and are available from the authors upon request.

11 We do not obtain any statistically significant coefficient neither for BOARD, NED nor GENDER. This could be due, at least in part, for the inclusion of other bank-level controls as well as because the consideration of bank fixed effects.

12 The results also hold when including CEO duality and the percentage of independent directors as control variables.

13 In further robustness tests, we check that the results hold when we exclude one by one each country from the sample. Moreover, as Ireland could be considered a country with different socio-economic and cultural characteristics, we also corroborate that results remain invariant when the baseline regression is ran on the sample of Irish banks. The results also hold when Ireland is excluded from the sample. These results are available upon request.

14 EBA/GL/2014/14. Guidelines on materiality, proprietary and confidentiality and on disclosure frequency under articles 432(1), 432(2) and 433 of regulation (EU) no 575/2013.

Additional information

Funding

This work was supported by European Commission: [EU proposal 878513 – Hercule III 2019 Legal Training and Studies, HERCULE-2019-LT-AG]; Comunidad de Madrid - UAM: [Grant Number SI3-PJI-2021-00276]; Comunidad de Madrid – UAM: [Professorship Excellence Program in accordance with the multi-year agreement signed by the Comunidad de Madrid and the Universidad Autónoma de Madrid (Line #3)]; Secretaría de Estado de Investigación, Desarrollo e Innovación: [Grant Number PID2020-118064GB-I00].

Notes on contributors

Pablo de Andrés

Pablo de Andrés is Professor of Finance, and Head of the Finance Unit at the Autonomous University of Madrid. He is also a Research Member of the European Corporate Governance Institute (ECGI) and Honorary Fellow of the Hanken School of Economics. He has focused his research on the analysis of financial decisions, real options, and corporate governance. His interest in corporate governance started early in his career, as he was awarded the European Investment Bank Prize for young researchers (1997) for his work ‘Financial system models, corporate governance and capital investment in OECD countries: Some stylized facts’. Since then, he has published his research in finance and business high-impact journals. In the last years, he is specially interested in the interplay between corporate governance, finance, and technology. He set up a lab with the start-up Collisio Technologies, where a multidisciplinary team researches on the financing strategies through digital channels and assets.

Salvatore Polizzi

Salvatore Polizzi, PhD is Assistant Professor of Banking and Finance at the Department of Economics, Business and Statistics, University of Palermo (Italy) where he teaches Banking and Financial Intermediation. His research interests include banking, risk management and disclosure. During his academic career, he worked for the European Central Bank and Banca d'Italia. He held a visiting researcher position at the Bangor Business School, Bangor University, UK. He is Member of the European Association of University Teachers in Banking and Finance (Wolpertinger club), of the Italian Association of University Teachers in Banking and Finance (ADEIMF) and of the Italian Academy of Management (AIDEA). His publications appear in reputable academic journals in the field of banking and finance, including the Journal of International Money and Finance, the Review of Quantitative Finance and Accounting and European Financial Management, amongst others. He is also author of a monograph entitled ‘Risk Disclosure in the European Banking Industry’, published by Springer in 2022.

Enzo Scannella

Enzo Scannella is an MBA, PhD, Professor of Banking and Finance at the Department of Economics, Business, and Statistics, University of Palermo (Italy) where he teaches Banking, Economics and Management of Financial Institutions, Risk Management. His main research interests are focused on banking, financial regulation, risk management, risk disclosure, and financial innovation. He has held visiting positions in foreign universities, including Harvard Business School (Boston, USA), Universidad Autónoma de Madrid (Madrid, Spain), and Carleton University (Ottawa, Canada). His publications appear in leading nationally and internationally recognized academic journals. He has also contributed to a number of books. He is a member of various scientific associations, university research groups, editorial boards, and scientific committees for conferences. He is a member of the European Association of University Teachers in Banking and Finance (Wolpertinger), the Italian Academy of Management (AIDEA), and the Italian Association of University Teachers in Banking and Finance (ADEIMF).

Nuria Suárez

Nuria Suárez, PhD (Extraordinary Doctoral Award), University of Oviedo (2010), is member of the Finance Departament at the Universidad Autónoma de Madrid since 2017. Her research interests focus on the banking and corporate finance field. She has published articles in recognized international finance journals, such as Journal of Banking and Finance, Journal of Corporate Finance, Journal of Financial Stability, Journal of International Financial Markets, Institutions & Money, Journal of International Money and Finance, International Review of Economics and Finance, or International Review of Law and Economics, among others. She is also author and coauthor of book chapters published by Springer and Nova Science Publishers. She usually attends to the main international and national research conferences in banking and finance and has been member of several research projects during the last ten years. She is currently the main researcher of a research project granted by the Comunidad de Madrid. Nuria has been Visiting Professor at the University of Palermo (2018), in Italy. During her doctoral studies, she visited the Business Department of the Carlos III University of Madrid (2010).