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BHC brilliance in the fog of uncertainty: Illuminating trends in bank performance 

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Abstract

This paper investigates the impact of economic policy uncertainty (EPU) on U.S. banks' performance over the period 2001:Q1-2021:Q1. The empirical results indicate that EPU exerts an adverse influence on banks’ return on assets (ROA), but this effect diminishes with the increasing level of bank ROA. The baseline result remains resilient to using state-level EPU as an alternative measure of policy uncertainty. In addition, the findings survive a battery of robustness and endogeneity tests, including instrumental variable (IV) regressions. It is observed that EPU exhibits a differential impact on banks' ROA during the 2008 financial crisis and the COVID-19 pandemic. Finally, it is found that while the deterring effect of EPU is more pronounced for banks with greater earning opacity, it is significantly mitigated by a bank’s search for yield, managerial ability, and diversified business models.

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Notes

  1. For instance, Iqbal et al. (2020) document that EPU significantly reduces U.S. non-financial firms’ profitability and value, and this effect is valid for both financially constrained and non-constrained firms. Numerous studies have demonstrated how rising policy uncertainty influences corporate investment decision-making (e.g., Kang et al. 2014; Kong et al. 2022; Chen et al. 2019; Gulen and Ion 2016; He et al. 2020; Xu 2020), cash holdings (e.g., Demir and Ersan 2017; Duong et al. 2020; Phan et al. 2019), and capital structure (e.g., Zhang et al. 2015; Li and Qiu 2021; Bajaj et al. 2021; Lee et al. 2017). While these studies have utilized the EPU indices at the national and/or international levels, a number of recent studies have focused on the local and state-level EPU and their impact on corporate performance (e.g., Alam et al. 2023a; Alam et al. 2023b; Baker et al. 2022; Choi 2023).

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Acknowledgements

The authors gratefully acknowledge the financial support from the Banking Academy of Vietnam.

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Authors and Affiliations

  1. Banking Academy of Vietnam, Hanoi, Vietnam

    Minh N. Nguyen, Hung M. Pham, Anh Phan & Dung V. Tran

  2. Kean University, Union, NJ, USA

    Ahmed W. Alam

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  1. Minh N. Nguyen
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  4. Ahmed W. Alam
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Correspondence to Ahmed W. Alam.

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Nguyen, M.N., Pham, H.M., Phan, A. et al. BHC brilliance in the fog of uncertainty: Illuminating trends in bank performance . J Econ Finan (2024). https://doi.org/10.1007/s12197-024-09664-z

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