Masters Dissertation

Companies Annual Reports and COVID-19: How the Pandemic Is Represented and Communicated in The Reports to Stakeholders



1.1 Background to the study

According to the World Health Organization, there were more than 200 million verified COVID-19 infections and approximately 5 million fatalities globally as of May 2022 (WHO, 2021). Countries throughout the globe have been hit by this epidemic. To limit the spread, governments implemented travel restrictions, social seclusion, lockdowns, and the suspension of non-essential corporate operations (Kunt, Pedraza & Ortega, 2021).

The modern practice of financial reporting has been highly crucial since the beginning of the companies. The financial reporting of a company is extremely significant as it offers insight into the company’s performance. Financial reports that are executed and performed timely offer insight for stockholders, creditors, and other investors to get an impression of a company’s financial integrity and creditworthiness (Barth and Landsman, 2010). Moreover, it also helps the company and its stockholders make rational decisions regarding loaning or investing in their company. However, it has been found that since the arrival of the deadly pandemic named Covid-19, things have been disrupted in almost all domains of life. It has been understood from the study by Levy (2020) that the first quarter of 2020 was recognized as one of the most challenging for companies in a very ample time. Even though most of the economies endured their restrained growth path at the start of 2020, this slowed down in the middle of March since the occurrence of the deadly COVID-19 epidemic took place in the majority of the parts of the world (Elgin et al., 2021). Several governments responded with limitations on economic activities. However, which possesses no primacy in the latest history. Additionally, the primary outcome is disturbances in executing everyday business to a wide-ranging lockdown of certain businesses and activities (Zamarripa, 2020).

It has been found that the financial outcome for reporting periods that finished March 31st, 2020, was expected to be restricted for maximum industries because of the little sum of time amid the completion of the reporting duration and the worldwide occurrence of the global Covid-19 pandemic (Yuan, 2021). On the other hand, the influence at present and on the upcoming reporting season is inclined to be more crucial. It is believed that economically significant countries are expected to experience a more considerable than expected downturn (Augustin et al., 2021). Moreover, the ambiguity regarding the additional growth of the pandemic and the extensive consequence on financial markets, sales, supply chain, and other domains contribute momentous suspicions to the financial results and viewpoints, which require vigilant contemplation in investor communication (Wei & Han, 2021). However, the good part is that the knowledge regarding the Covid-19 epidemic has upsurged in recent times. Due to that, the rates of infection have also diminished considerably in many world regions. However, it remains a considerable hazard for the rest of the year and perhaps beyond. Apart from this, it has been assessed from the study of Šušak (2020) that during the terrible times of COVID-19, auditors have also discovered that their clients are facing issues intending to retain their control documents updated and therefore, upsurged verbal touchpoints might be required for the auditor to comprehend the newest deviations to controls and connected available audit evidence.

Furthermore, from Hay, Shires, and Van’s (2021) study, keeping the up-surged complexities produced by the current environment regarding emerging approximations and making concerning judgments, there are high chances of pressures and opportunities to commit fraud.

Even though the risk of fraud is not new, the pandemic has instigated significant operational and financial disturbances, resulting in augmented burdens on businesses, staff, and stakeholders. The study conducted by Collier and Mayer (2020) sheds light that internal control environments that are weak and in which significant control owners are functioning distantly or have been furloughed or dismissed, joined with circumstances where organizations, their supply chain, and consumers might be distraught and therefore, struggling monetarily produce prospects for fraud, either through management of financial results, falsification of facts or misappropriation of assets(Webley and Werner, 2008). Irrespective of whether the auditor plans to depend on the functioning efficiency of controls, they are still needed to understand internal control pertinent to the audit. This understanding, comprising the strategy and execution of any variations in controls applicable to the audit, backups up the documentation of possible misstatements and factors that impact the jeopardies of material misstatement. Moreover, from the study of Ahrens and Ferry (2021), keeping the current situation in mind, auditors must need to comprehend the influence of alterations on all internal control mechanisms (counting how the entity has countered to risks rising from IT).

1.2 Problem Statement

COVID-19 has an enormous and detrimental influence on the profitability of UK banks, according to previous studies (Berger & Sedunov, 2017). Since banks are the primary source of liquidity insurance for countries, a well-functioning banking system promotes economic development via liquidity forecasting and credit distribution (Elnahass, Trinh & Li, 2021). While there were worries about the banking sector’s ability to execute its anticipated intermediation during the COVID-19 epidemic, there were also reservations about the banking business itself (Cecchetti & Schoenholtz, 2020). As a result, it is critical to look at how the COVID-19 epidemic may affect the banking industry’s financial health. Bank systemic risk across nations has grown due to the pandemic’s negative effect on financial performance and stability (Berger et al., 2021, Elnahass, Trinh & Li, 2021, Duan et al., 2021).

Governments needed to implement several containment measures such as social isolation and lockdown to stop the virus from spreading. However, these policies had detrimental economic impacts on businesses and people (Duan et al., 2021). As a result, businesses are seeing significant revenue decreases and cost increases, while consumers are seeing job losses and dropping wages (Barua, 2020). As a result, businesses and people may be unable to fulfill their loans, raising the risk of default (Bartik et al., 2020). Banks may be affected by these consequences, leading to revenue losses and an increase in non-performing loans, all of which would hurt earnings, solvency, and capital for banks (Beck & Keil, 2020). There may also fall in non-interest revenue due to decreased demand for financial services, which would lower bank profits (Duan et al., 2021). As a result, banks may be exposed to more significant credit risks, increasing systemic vulnerability (Ozili & Arun, 2020).

It is believed that since there have been crucial modifications to systems and controls due to the pandemic, the management is incredibly accountable for recognizing and evaluating new risks that may probably arise from system changes. Furthermore, from the study conducted by Gibson (2012), the company’s financial reporting is highly significant as it offers insight into its performance. Also, the reports implemented and performed timely offer insight for stockholders, creditors, and other investors to get an impression regarding a company’s financial integrity and creditworthiness. Hence, it is viable that the ongoing pandemic has caused significant turbulence in all domains of life, and modifications to operations, systems, and controls have been made due to the effects of the pandemic (Macknight, 2021). Moreover, it has been found that prevailing and prospective shareholders are creating an asset decision based on published financial reporting.

Furthermore, they need to understand how the pandemic affects the enterprise and what the economic influences of the pandemic would be (Barattieri, Eden, & Stevanovic, 2020). However, the investment decisions are made on the grounds of projected future cash flows, which indicates that the information provided should enable the users of financial statements to understand the current and past results and to form an opinion about the future returns. In the context of financial performance, the income statement showcasing net income and, more prominently, a functioning profit or loss is critical (Beck and Keil, 2021). Therefore, the current research aims to assess how pandemics affected companies’ financial results and how thoroughly the effects were revealed. Moreover, since the occurrence of Covid-19 has been relatively new, there have not been many findings regarding how the pandemic is represented in the annual reports of UK companies and how it is communicated to various groups of stakeholders/users.

1.3 Objectives of the study

The main objective of this study is to investigate the UK company’s annual reports and COVID-19 and evaluate how the pandemic is represented in these reports and how it is communicated to various groups of stakeholders/users. Specifically, the study sought to examine:

1. How the pandemic is represented in the annual reports of UK companies and how it is communicated to various groups of stakeholders/users

2. How the pandemic affects UK companies’ financial results and how thoroughly revealed the effects are.

1.4 Research Question

1. How did the pandemic affect UK companies’ financial results, and how thorough have the effects been revealed?

1.5 Research Plan

As understood from the study of Collier and Mayer (2020), the influence of COVID-19 on the procedures and controls of the clients of the companies, and the audit response, is inclined to be reliant on entity-specific circumstances. In this swift changing and complex environment of Covid-19, it is understandable from the study of Ahrens and Ferry (2021) that auditors should be encouraged to be vigilant through the course of their schedules and to contemplate alterations required in their audit approach, comprising the arrangement of the appointment team, management of staff members, and the appraisal of their work. Moreover, auditors’ activity of expert incredulity remains exceptionally significant for examiners in comprehension, surveying, and reacting to fundamentally changed conditions. Other than this, the bits of knowledge accomplished from the review will be highly significant for our thesis as the review helps in establishing that evaluating firms is fundamental for the organizations as it helps in improving and upgrading the strategies of reviews and the preparation programs that tends towards inspecting the tone of the organization at the top. The discoveries further uncover that it is vital to illuminate and include the administrative review body for giving proper and the best rules to the examiners to assess the tone of the organizations.

Notwithstanding, the innovations and hypotheses that the firm picked were comprehensive of the Big 4 inspecting firms alongside the associations complying with the rules of International Standards of Auditing (Jaffer, Odendaal, and Theron, 2022). By keeping the above revealing in mind, it has been perceived that regularly the organizations are imploded because of the deceptive direction of their top administration around the world. Notwithstanding, the organizations consistently follow around seven percent of their incomes due to the fakes with impact to significant misfortunes ascribed to defilement by top administration. It has been determined that the key components that are important to assemble a moral culture inside an organization incorporate a bunch of center ethical qualities, a proper ethics program, and the continued presence of ethical initiative (Schwartz, 2013). These findings have been highly crucial as they will play a prominent role in helping the author analyze how the pandemic is represented in the annual reports of UK companies and how it is communicated to various groups of stakeholders/users. The author of the current study will critically scrutinize the findings that have been attained from the analysis.

Moreover, as revealed from the study of Kaptein, (2011), a bunch of center moral qualities distinguished by an association with both the present and the future at the top of the priority list and connected with numerous issues confronting directors and workers – with an obligation towards one another, the organization’s partners and additionally society overall and remembered for a governing set of rules, is by. They were primarily acknowledged as the root of any organization’s moral arrangement. Therefore, the author of the study has greatly acknowledged the significance. Hence, it is crucial to research it, keeping the current turbulent situation of Covid-19 in mind. The study’s author will accumulate data from authentic and reliable sources that can help carry out relevant and meaningful research. To get a better outcome of the results, the author will conduct interviews with the auditors of specific companies. This will greatly help understand the effect that Covid-19 has had on the modern financial accounting practice.

1.6 Justification of the study

As a result of the COVID-19 epidemic, the entire economy and the global financial market are in danger. An external shock has hit the banking industry and other financial institutions (Elnahass, Trinh & Li, 2021). Financial institutions’ profits are at risk, revenues are down, and debtors cannot make payments due to the recession brought on by COVID-19 (Perkins & Gnanarajah, 2021). The growth estimates of key international organizations and banks have to be reduced (Elnahass, Trinh & Li, 2021). In Schroeder’s (2021) study, he states that more than half of UK banks saw their earnings decrease and that 7.3 percent of lenders were unprofitable due to the declining economic activity. Non-current loans grew by 7.5% month-on-month, the most significant rise since 2010, according to him. According to the most recent report, the bank has put aside $38.8 billion for future loan losses, up over 280% from the previous year. Industrial and commercial credit charge-offs rose by 87 percent, while overdue bank loans rose by roughly 15 percent (Schroeder, 2021).

Furthermore, this study will also assess how the banks have been able to cope with their internal activities, keeping the hard times like Covid-19 in mind, while providing recommendations on the negative effect of the COVID-19 pandemic on the financial performance of the banking industry of the UK.

1.7 Scope of the study

This study focused on examining UK company’s annual reports and COVID-19; how the pandemic is represented in these reports, and how it is communicated to various stakeholders/users. The study will be limited to five operating banks in the UK, namely; Barclays, HSBC, Lloyd, Metro Bank, and Natwest bank.



2.1 Overview of Coronavirus

Known as COVID-19 (coronavirus disease 2019), a new respiratory sickness was discovered in December 2019 in Wuhan, China. Abdulla and Lee (2021) say that the most common symptoms of the disease are fever, dry cough, exhaustion, myalgia, and dyspnea. 18.5 percent of COVID-19 patients in China progress to the severe stage, characterized by acute respiratory distress syndrome, septic shock, difficult-to-treat metabolic acidosis, and blood coagulation and bleeding problems (Utibe, 2019).

Wuhan, China, announced its first confirmed case of Ebola, with symptoms including fever and cough, on December 12, 2019. A wide range of channels, including air travel, have allowed the 2019-nCoV virus to spread rapidly around the globe, making it the world’s pandemic concern (Felix, 2020).

CoVs are a novel class of respiratory viruses that may cause everything from the ordinary cold to the deadly SARS disease (Yin et al., 2019). Infectious diseases transmitted between humans and animals are known as zoonotic diseases. With 860 deaths, the SARS and MERS-CoV epidemics occurred between 2002 and 2012, respectively (Lee, 2020). About eight years after the MERS-CoV pandemic, a new coronavirus epidemic (COVID-19) appeared in Wuhan City, Hubei Province, China, as a global outbreak and a significant public health threat. The World Health Organization (WHO) declared COVID-19 a public health emergency of global significance on January 30, 2020. (PHEIC).

There were many new cases worldwide in the first week of March, which indicates the beginning of a pandemic. An estimated 111,000 cases have been reported as of March 9, 2020, with over 3,800 people have died in 105 nations (Philemon et al., 2020).

It takes between two and fourteen days for COVID-19 to spread from one person to the next by droplets, feces, or direct contact. An antiviral treatment or vaccine suggestion has not been made for COVID-19. Preventative interventions are essential to limiting the spread of COVID-19. A significant risk of infection is considered for healthcare workers (HCWs) since they have direct contact with patients and are a primary source of infection exposure. HCWs were provided COVID-19 recommendations by the WHO and CDC (Centers for Disease Control and Preventives) in late January. The WHO has published several online COVID-19 training sessions and materials to support preventative measures, such as promoting awareness and teaching healthcare workers (HCWs) about preparedness operations (Malik, 2020). Misconceptions of healthcare workers (HCWs) might delay attempts to provide proper treatment, indicate a rapid spread of illness in hospitals, and put patients’ lives at risk. With the COVID-19 outbreak, HCWs may review their knowledge and perspective on this global health crisis in a once-in-a-generation opportunity.

Researchers believe that respiratory aerosols produced by SARS patients when they cough or sneeze disseminate the coronavirus (Malik, 2020). Droplets from an infected patient’s cough or sneeze are dispersed into the air, where they might infect other people via their mouths, noses, and eyes. Viruses may be transmitted by direct contact with the mouth, nose, or eyes after contact with infected surfaces (Centers for Disease Control and Prevention, 2020).

As far back as November 2002, Guangdong has been the epicenter of SARS (severe acute respiratory syndrome). Live-game trading became an issue for many individuals in November and December 2002, when they first contacted it. The term “infectious atypical pneumonia” was coined because it tended to spread among families and healthcare workers. For the first time since SARS was found, the virus that causes the disease has been identified as a new coronavirus. Abdulla and Lee (2021) say that There was no serological indication that the human population had been infected with COVID-19 before, and interspecies transmission from animals to humans appeared like the most plausible cause for its emergence. It was discovered that samples were taken from animals that appeared to be healthy (such as Himalayan palm civets (Paguma larvata) and wild-game animal marketplace raccoon dogs (Nyctereutes procyonoides) in Guangdong produced a COVID-19-like virus with over 99 percent nucleotide similarity to the human COVID-19). However, the natural wild-animal reservoir is still a mystery. Antibodies to the animal COVID-19-like virus were found in some wet market workers, even though they had no history of SARS. These Guangdong wet markets may have functioned as a human transmission site for SARS in conjunction with several SARS-affected patients in November and December 2002 had epidemiological connections to the wild-game animal trade. The first interspecies transmissions to humans were probably ineffectual, resulting in very little human illness or transmission between humans. Animal precursor COVID-19-like virus evolved into coronavirus due to improved transmission efficiency from people to people from the coronavirus (Kwok, 2021).

2.2 Government policy responses to COVID-19

The COVID-19 pandemic has significantly impacted the financial markets and the banking industry. Authorities in the financial industry have taken several temporary policy measures, including decreasing reserve requirements, cutting interest rates, and instituting moratoria on loan repayment.

2.2.1 The financial sector

Feyen et al. (2021) investigate the factors that influence the responsiveness and activity of policymakers in emerging markets and developing countries. More prosperous and populous nations responded quicker and implemented many policy measures; countries with more considerable private debt tend to take banking, liquidity, and finance policies sooner. According to them, policymakers’ reactivity and actions are not significantly impacted by the proliferation of COVID-19, macro-financial conditions, or political context. Many policy initiatives contradict the principles of international financial standards and recent advice from traditional establishing institutions such as the IMF and the World Bank, according to Feyen et al. (2021). It has been suggested by Wei and Han that the onset of a pandemic may have made it more difficult for monetary policy to reach the financial market and that conventional monetary policy may be employed to reenergize the market and halt the subsequent economic decline.

2.2.2 The Banking Sector

Banking has become more robust to the COVID-19 shocks as a result of Basel III reforms and several country-specific improvements in bank supervision and regulation, according to Berger and colleagues (2021). According to them, national government measures have helped stabilize the banking system and have reduced the economic effect of the pandemic on its core business in some nations. Different policy efforts are examined by Kunt, Pedraza, and Ortega (2021) to analyze the impact of various policy measures on addressing bank stress, including liquidity support, prudential measures, borrowers’ help, and monetary policy measures. The researchers conclude that liquidity support and borrower aid initiatives significantly influence atypical bank returns.

Another study claims that monetary policy has played an essential part in this pandemic problem, with policy decreases in interest rates primarily benefitting banks with less liquidity. Some banks have been spared from the pandemic’s negative impacts by these policy measures, but this is not the case for all institutions.

2.2.3 Federal Reserve

One of the worst recessions in US history was triggered by the COVID-19 outbreak and activity limitations in the first half of 2020. (Cachanosky et al., 2021). Economic issues created by the COVID-19 epidemic and its accompanying activity limitations prompted the Federal Reserve Board (Fed) to begin reacting in March 2020 with monetary and emergency lending policies. There are two distinct types of policies used by the Federal Reserve: one is the general level of economic activity. The other is monetary policy, which refers to its attempts to affect interest rates and the yield curve. According to Feldkircher, Huber, and Pfarrhofer (2021), rising stock prices and more favorable long-term financing circumstances helped the Fed accelerate growth. Another source claims that the Federal Reserve has introduced many credit initiatives, including financing to municipalities and non-bank firms (Cchanosky et al., 2021). Although the Fed’s monetary policy aids in economic recovery, they feel that more steps should be taken to ensure monetary stability.

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2.3 The impact of the COVID-19 pandemic on the financial markets

Financial markets were rattled by an unprecedented worldwide epidemic, which affected people’s health and the whole economy (Goldstein, Koijen & Mueller, 2021). When the economy goes into recession due to lockout and suspension of work measures, the financial markets become more volatile, according to Guo Li and Li (2021). The pandemic has a detrimental influence on the worldwide financial system, which raises tail risk spillovers in the international financial market. Like Izzeldin et al. (2021), they analyze ten business sectors and 7 G7 nations for the COVID-19 financial crisis. According to their findings, the financial markets in the United Kingdom and the United States have been struck the most. Instead of finding that utilities, energy, real estate, and consumer discretionary items like hotels and luxury goods were affected especially hard by the systemic shock, as Kwan and Mertens (2020) claim, we find that airplanes were not.

There were significant stress on the UK Treasury bond market, corporate bond markets, and money market funds in March of 2020, according to Goldstein, Koijen, and Mueller (2021). There is a belief that the Federal Reserve’s quick intervention to prevent a full-scale financial catastrophe was a significant factor in the financial market’s speedy recovery. Even if the CARES Act has considerably alleviated specific unique shocks and default risks, Kwan and Mertens (2020) point out that there are still significant disparities across sectors. For example, the Federal Reserve’s bond-buying program helps reverse withdrawals, particularly for vulnerable funds, and the liquidity assistance sent to the real economy through funds. (Falato, Goldstein, and Hortacsu, 2021) These funds were vulnerable during the epidemic, and the Federal Reserve’s measures helped stabilize them, according to their study. According to them, asset illiquidity, fire-sales susceptibility, and sector exposure are the primary causes of fragility. When it comes to stabilizing the economy, the Federal Reserve’s bond-buying program is effective.

2.4 The impact of the COVID-19 pandemic on the banking industry

COVID-19’s influence on the banking industry has been examined in recent research. Banking stability and performance, systemic risk, bank lending, and non-performing loans will be examined in this section.

2.4.1 Stability and performance of the banking sector

According to Trinh, Elnahass, and Li (2021), Coronavirus poses an unprecedented threat to the world economy. Exogenous shocks have hit financial institutions immediately, and this pandemic’s effects on the global financial system must be carefully considered. Before and after the pandemic, Elnahass, Trinh, and Li (2021) examined the influence of COVID-19 on financial performance and stability using accounting-based, market-based, and risk-based metrics. From the first quarter of 2019 to the second quarter of 2020, 1090 banks from 116 countries were surveyed. A considerable decline in bank profitability, stock market values, financial stability, and cost-effectiveness were seen during the COVID-19 disaster. However, they predict that bank stability will improve in the second quarter of 2020.

COVID-19 and ROA/SDROA of UK banks had a strong negative association in the test for the United States, China, and the United Kingdom/Europe. This finding suggests that COVID-19 has had a detrimental impact on these nations’ banks. Although there is some evidence of the pandemic’s negative impact on the UK’s ROE ratio in Elnahass, Trinh, and Li’s (2021) accounting- and market-based measures, the authors claim that profitability in UK banks was poor during the outbreak, while ROA and cost/income ratios in UK banks were negligible.

A similar line of study by Kunt, Pedraza, and Ortega (2021) has also looked at how the COVID-19 epidemic affects banks. Still, their emphasis is on whether the shock has a different effect on banks and corporations. COVID-19 pandemic has a detrimental effect on banks, by Elnahass, Trinh, and Li (2021). According to the researchers, the shock has a more significant and longer-lasting effect on banks than on corporations and other non-bank financial organizations. Larger and public banks and those with a smaller liquidity base have seen their returns decrease more quickly, consistent with their increased susceptibility to shocks.

2.4.2 Systemic risk

The collapse of the whole banking system, which is considered a sign of financial instability, is what Borri and Giorgio (2021) identify as a “systemic risk.” Because of a series of circumstances, the situation has deteriorated to the point that it may finally lead to disastrous results.

For example, Duan et al. (2021) claimed the 2008 financial crisis led to an increase in the tail comovements of banks, which led to the collapse of whole financial institutions.

A study by Borri and Giorgio (2021) examines the systemic risk of significant European banks during the previous twenty-three years. In 2020, they looked at how the COVID-19 pandemic may affect systemic risk, emphasizing the banks in 64 different nations. Due to the pandemic, giant, highly leveraged, risky, and high loan-to-assets banks are more susceptible to systemic risk, according to Duan et al. (2021).

2.4.3 Bank lending and non-performing loans

To stem the spread of the epidemic, various governments implemented lockdown measures that pushed businesses and consumers into solvency and liquidity difficulties. Consequently, borrower credit risk goes through the roof when a pandemic strikes. Colak and ztekin (2021) evaluated worldwide bank lending trends utilizing global data on 125 nations’ banks. According to new research, Bank and country-specific variables influence the effect of COVID-19 on loan growth. They say that tiny, foreign, government-backed, low-ROA banks mainly influence lending. Financial intermediaries, bank loans, and the credit markets are all strongly impacted, which restricts credit availability, according to the study’s authors. On the other hand, the financial crisis’ impact on bank lending has been lessened thanks to tighter regulation and oversight.

To put it another way, Ari, Chen, and Ratnovski (2021) claim that many bank crises are characterized by large levels of non-performing loans (NPLs) that are either in default or about to fail. As a result of the severe downturn brought on by the COVID-19 issue, they argue, non-performing loans will rise and bank balance sheets will become more fragile. During 92 financial crises during the 1990s, Ari, Chen, and Ratnovski (2021) studied non-performing loans’ dynamics. During the epidemic, most banks saw a spike in non-performing loans, and many governments were unable to address these debts quickly. Unresolved non-performing loans impeded the recovery after the financial crisis, according to the researchers. High credit growth, fixed exchange rates, high government debt, poor bank profitability, and high corporate debt are among the risk indicators identified by Ari, Chen, and Ratnovski (2021). With regard to avoiding non-performing loans, they feel that financial sector policies and macroeconomics are critical.

2.5 Determinants of bank profitability

A bank’s success may be gauged by looking at its profitability. The capacity to achieve a positive balance between an economic entity’s revenue and costs by using financial and non-financial resources is what is meant by the term “profitability” (Borroni & Rossi, 2019). According to previous studies, bank profitability may be explained by a number of factors. Some of the most significant factors will be discussed in this section. Cyclical and bank-specific determinants are the two main types. According to my research, the influence of efficiency rations, non-performing loan ratios, and capital ratios on bank performance is examined in this section.

2.5.1 bank-specific determinants

According to Elekdag, Malik, and Mitra (2020), bank capital is a significant driver of bank profitability. It has been shown that increasing a bank’s capital ratio positively impacts efficiency and profitability, and this finding is supported by Bitar, Pukthuanthong and Walker (2018).

It has been shown that boosting the capital ratio may improve projected returns in earlier work by Athanasoglou, Brissimi, and Delis (2008). Capital is more effective for huge and too-big-to-fail banks than for highly liquid banks, according to Bitar, Pukthuanthong, and Walker (2018). According to their findings, risk-based capital ratios do not reduce bank risk. Intriguingly, Tran, Lin, and Nguyen (2016) assert that the profitability of a bank’s capital relies on the amount of capital in the institution. They point out that the connection between regulatory capital and the development of liquidity is particularly evident in smaller institutions. They argue that boosting regulatory capital for low-capitalized banks would lessen the chance of default and enhance the bank’s financial condition.

Another essential aspect influencing banks’ overall performance is the NPL ratio, according to Elekdag, Malik, and Mitra (2020). This statistic serves as a risk management indicator. According to their data, real GDP growth and the non-performing loan (NPL) percentage are the most stable drivers of bank profitability across big euro area banks… According to the findings of these studies, banks’ long-term profitability difficulties may not be solved by an economic recovery alone. Because of this, they believe that reducing NPLs while also improving efficiency is the best way to raise long-term profitability. Bank costs are cited as a critical predictor of bank profitability by Athanasoglou, Brissimis, and Delis (2008), who also link the concept of efficiency to bank profitability. Following Elekdag, Malik, and Mitra, their findings suggest that the ratio of these costs to total assets has a detrimental impact on profitability (2020). As a result, according to Athanasoglou, Brissimis, and Delis (2008), better control of these costs may lead to greater efficiency and, ultimately, higher profitability.

2.5.2 Cyclical determinants

Several studies have shown that profitability tends to rise and fall with the economy (Elekdag, Mallik & Mitra, 2020). The financial crisis and severe recession have resurrected interest in the question of procyclical bank profitability, according to Bolt et al. (2012). They study whether bank profitability is more cyclical during a significant recession than regular economic times. During severe recessions, bank earnings are very robust, and loan losses are the primary driver of the results. They believe that net provisions and expenses would rise during a prolonged recession. Their findings demonstrate that each percentage point of real GDP contraction leads to a one-quarter percentage point drop in the return on bank assets for each percentage point of fall in real GDP. Bolt et al. (2012) also point out that long-term interest rates are a key factor in bank profitability in periods of rapid economic growth. According to Athanasoglou et al. (2008), long-term interest rates (or inflation expectations) have a significant and favorable influence on profitability. Due to the disinflation in the Greek economy during the period under consideration, interest rates on bank deposits dropped quicker than those on loans.

2.6 Theoretical framework

Stakeholder theory

The term “stakeholder” was initially coined in a 1963 Stanford Research Institute letter. In the 1990s, Freeman reworked and popularized the idea. As a result, strategic management, corporate governance, business purpose, and corporate social responsibility have achieved widespread acceptability in the business world.

The term “stakeholders” may refer to a group of people or an entire society with a stake in a particular organization or cause. Stakeholders may be able to participate in everyday decision-making and potentially impact how well an organization runs. Supply chain participants include everyone who directly or indirectly affects how a company does business, such as vendors, carriers, customers, and anyone involved in delivering goods and services (Bojan et al., 2012).

From Freeman 1984, the stakeholder idea may be traced back to its origins. For Freeman, as shown by Pfeffer and Salancik (1978), organizations are not self-sufficient and must rely on the external surroundings of the business for their survival.

According to supporters of the stakeholder’s theory, management plans, strategies, and events should be tailored to accommodate the various needs of the different stakeholders whose activities directly or indirectly shape the total performance of such an organization. This is a fundamental principle of stakeholder theory.

As part of the stakeholder’s theory, organizations’ interactions with groups outside of themselves are considered when designing procedures and results for the stakeholders and the company as a whole.

Stakeholders’ theorists contend that there is no one dominating set of interests for genuine stakeholders in an organization, as Clarkson (1995) and Donaldson and Preston (1995) have highlighted.

To ensure that the actions of an organization are in line with the interests, ambitions, and demands of external stakeholders, the stakeholders’ theory explains how they exert influence on organizational decision-making.

Organizations are encouraged to get a better knowledge of stakeholders so that they may find a middle ground in the interests of all parties concerned.

Although Clarkson (1995) and Rowley (1997), Scott and Lane (2000), and Baldwin (2002) argue that the concept of stakeholder management was coined and brought into reality to enable firms, organizations, and businesses to become aware of; analyze the characteristics of groups/individuals that on the one hand influence the organization’s behavior, and on the other hand are a source of conflict.


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