DOES CORRUPTION-RELATED DISCLOSURE TRIGGER MARKET DISCIPLINE? EVIDENCE FROM THE BANKING SECTOR OF THE GIPSI COUNTRIES

Abstract

This paper investigates the relationship between corruption-related disclosure in banking and the market discipline exercised by depositors. We examine to what extent depositors penalize banks that are opaque with reference to their corruption-related disclosures by demanding higher interest rates for their deposits. By focusing on the banking industry of the GIPSI countries (Greece, Ireland, Portugal, Spain and Italy), we show that banks which disclose less on corruption-related issues tend to be penalized by depositors, who ask for higher interest rates, likely to counterbalance the negative consequences of possible involvement of such banks in corruption scandals. These basic relationships are shaped by specific bank-level characteristics and by the features of each country in terms of institutional quality.