The Externalities of Corruption: Evidence from Entrepreneurial Firms in China

The Externalities of Corruption: Evidence from Entrepreneurial Firms in China

Mariassunta Giannetti, Guanmin Liao, Jiaxing You, Xiaoyun Yu

Series number :

Serial Number: 
536/2017

Date posted :

November 02 2017

Last revised :

November 03 2020
SSRN Share

Keywords

  • corruption • 
  • Corporate governance • 
  • capital and labor allocation • 
  • China

Exploiting China’s anti-corruption campaign, we show that following a decrease in corruption, firm performance improves. Small and young firms benefit more. We identify the channels through which corruption hampers firm performance. Following the anti-corruption campaign, the allocation of capital and labor becomes more efficient.

Firms operating in ex ante more corrupt environments experience larger productivity gains, higher growth of sales, and lower cost of debt than other firms. Taken together, our results suggest that corruption is an inefficient equilibrium for an economy because it creates negative externalities.

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Published in

Published in: 
Publication Title: 
Review of Finance, Forthcoming

Authors

Real name:
Guanmin Liao
Real name:
Jiaxing You
Professor of Finance
Real name:
Xiaoyun Yu
Kelley School of Business, Indiana University, and a research member of the European Corporate Governance Institute