The Impact of Credit Market Development on Corporate Profits Management: Empirical Analysis of Banking and Branching Deregulations

Abstract

This empirical study investigates the multifaceted relationship between credit market development and corporate profit management, with a particular focus on the effects of banking and branching deregulations. In recent decades, numerous countries have embraced financial liberalization policies aimed at fostering greater access to credit, and this has created a dynamic environment for corporations seeking to optimize their profits. Using a comprehensive dataset spanning multiple industries and regions, we employ a panel data approach to analyze the intricate interplay between credit market development and corporate profit management. Our findings reveal that banking and branching deregulation significantly influence corporate profit management practices. Specifically, we find that increased credit market development, resulting from deregulation measures, leads to a pronounced improvement in corporate profit management. Firms operating in environments with more accessible credit tend to exhibit greater transparency and accountability in their financial reporting, thereby reducing the likelihood of profit manipulation. Furthermore, our study highlights that the impact of credit market development on corporate profit management is not uniform across industries. Sectors heavily reliant on external financing, such as manufacturing and services, experience more substantial improvements in profit management following banking and branching deregulations compared to sectors with lower dependence on credit, like agriculture or mining. This underscores the importance of considering industry-specific factors when assessing the effects of financial deregulation on corporate behavior. In addition, we explore the moderating role of corporate governance mechanisms in this relationship. Our analysis suggests that strong corporate governance practices, including effective board oversight and shareholder protection, can enhance the positive effects of credit market development on corporate profit management. Firms with robust governance structures are better equipped to leverage increased access to credit for value creation and are less prone to opportunistic earnings management. Overall, our study contributes to the literature on both credit market development and corporate profit management by providing empirical evidence of the transformative effects of banking and branching deregulations. Policymakers, regulators, and corporate stakeholders should take heed of these findings when shaping financial market policies and corporate governance standards. As credit markets continue to evolve, understanding the nuanced interplay between financial liberalization and corporate behavior becomes increasingly vital for sustainable economic growth and financial stability.