Uneven Regulatory Playing Field and Bank Transparency Abroad
Journal of International Business Studies
55 Pages Posted: 23 Nov 2021 Last revised: 5 Jan 2022
Date Written: November 22, 2021
Motivated by international business research on institutional arbitrage and headquarters-subsidiary relationships, we examine the effect of regulatory distance on multinational banks’ (MNBs) reporting transparency abroad. Using an international sample of foreign subsidiary banks in 46 host countries from 47 home countries, we find that bank transparency declines when the home countries have tighter activity restrictions than the host countries. We bolster the causal inference using difference-in-differences designs that take advantage of banking reforms and cross-border bank acquisitions. We also find that the result is more pronounced when parent banks have lower capital ratios or when host countries have weaker supervisory power, suggesting that parent banks use opaque reporting to conceal risk-taking abroad. Further analysis finds that less transparent subsidiaries are more likely to fail during financial crises. Overall, our findings suggest that regulatory distance creates negative externalities for bank transparency and stability abroad.
Keywords: Transparency Within and Among MNEs and National States, Agency Theory, Multinational Corporations (MNCs) and Enterprises (MNEs), Headquarters-Subsidiary Roles and Relations
JEL Classification: G20, G21, G28, M40, M41
Suggested Citation: Suggested Citation