Economic policy uncertainty and bank earnings quality: the role of corporate governance and regulatory reforms in India

Abstract

Corporate governance and regulatory supervision are widely recognized as critical monitoring mechanisms in the banking sector. This study aims to investigate whether these mechanisms mitigate the adverse impact of economic policy uncertainty (EPU) on the earnings quality of Indian banks. Using a panel of 44 banks over 2005–2024, earnings quality is measured through discretionary loan loss provisions (DLLPs), and EPU is captured using the Baker et al.’s (2016) index. The analysis uses the two-step system generalized method of moments estimator to address endogeneity and dynamic panel bias. Corporate governance is proxied by a composite board index and its subcomponents, while regulatory supervision is measured by the post-2015 asset quality review. Heightened EPU significantly increases discretionary provisioning, and this effect remains robust across alternative DLLP measures and model specifications. Corporate governance attenuates the EPU–DLLP relationship in private banks but is less effective in state-owned banks. Regulatory supervision weakens the EPU–DLLP link primarily in state-owned banks. These results suggest that the moderating influence of governance and supervision depends on bank ownership. This study provides novel evidence on the interaction between policy uncertainty, governance and regulatory oversight in shaping earnings quality in banks. By distinguishing ownership-specific effects and incorporating a major regulatory reform, it provides policymakers with timely insights. It contributes to the growing literature on policy uncertainty and bank behavior in emerging markets.