Credit confidence: the impact of disclosure quality and audit quality on bank ratings in emerging economies

Purpose This study aims to examine how banks’ credit ratings can be driven by the quality of the disclosed financial and nonfinancial information in emerging economies. Design/methodology/approach Using a sample of 1,590 bank-year observations of 29 Islamic and 77 conventional banks across 17 MENA countries from 2006 to 2020, we conducted a random-effects regression model that is supported by various methods, including 2SLS and GMM models, to overcome the potential incidence of endogeneity concerns. Findings We found that the quality of voluntary disclosure positively influences the credit rating of Islamic and conventional banks. Although the spread and usefulness of disclosed information are positively associated with banks’ ratings, the quantity dimension is not. Audit quality also significantly influences Islamic banks’ credit ratings compared to their traditional counterparts. Practical implications Our evidence offers practical implications for regulators and standards setters in emerging economies to develop more effective disclosure regimes to enhance the impact of the quality of banks’ voluntary disclosures on their credit ratings. Originality/value Our paper contributes to the existing literature by investigating the effect of the quality of voluntary disclosures on credit ratings along three dimensions: quantity, spread and usefulness of the information. Further, our research contributes to the international accounting literature by investigating the effect of audit quality on the credit ratings of both conventional and Islamic banks in a cross-country setting.