Bank competition and earnings management: Does institutional quality matter?

Purpose This paper aims to investigate the relationship between bank competition and earnings management and the effect of institutional quality on this relationship. Design/methodology/approach To investigate the main objective of this research, we use a sample of 114 European Union (EU) banks from 2006 to 2019. The quantile regression method is the estimation technique used. Findings The results indicate that opportunistic earnings management increases in a highly competitive market. However, in countries with high institutional quality, competition can act as an external governance mechanism. Practical implications This paper has important implications for both researchers and financial authorities in the EU. Regulators should give more importance to the impact of the degree of competition on earnings management and reform the regulatory environment. Indeed, they should put in place new, stronger laws; better ensure their enforcement and aim for a level of competition in the market, which will reduce banking opacity and the opportunistic behavior of bank managers. Originality/value Most of the studies investigate bank-specific characteristics as determinants of earnings management, while few focus on country- and market-level factors. This research addresses this gap by empirically examining how institutional quality moderates the relationship between bank competition and earnings management.