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Public governance and corporate finance: Evidence from corruption cases

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Author Info

  • Fan, Joseph P.H.
  • Rui, Oliver Meng
  • Zhao, Mengxin

Abstract

Cross-sectional research finds that corporate financing choices are not only affected by firm and industry factors, but also by country institutional factors. This study focuses on the roles of public governance in firm financing patterns. To conduct a natural experiment that avoids endogeneity, we identify 23 corruption scandals involving high-level government bureaucrats in China and a set of publicly traded companies whose senior managers bribed bureaucrats or were connected with bureaucrats through previous job affiliations. We report a significant decline in the leverage and debt maturity ratios of these firms relative to those of other unconnected firms after the arrest of the corrupt bureaucrat in question. These relations persist even if we only focus on the connected firms that were not directly involved in the corruption cases. The relative decline in firm leverage is associated with negative stock price effects. We also examine the possibility that rent seekers are efficient firms and that corruption does not thus result in capital misallocation, but fail to find evidence to substantiate this postulation. Journal of Comparative Economics 36 (3) (2008) 343-364.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Comparative Economics.

Volume (Year): 36 (2008)
Issue (Month): 3 (September)
Pages: 343-364

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Handle: RePEc:eee:jcecon:v:36:y:2008:i:3:p:343-364

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Web page: http://www.elsevier.com/locate/inca/622864

Related research

Keywords: Public governance Corruption Rent seeking Regulated firms Corporate finance Capital structure China;

References

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Citations

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Cited by:
  1. Wu, W. & Johan, S.A. & Rui, O.M., 2012. "Institutional investors, political connections and incidence of corporate fraud," Discussion Paper 2012-042, Tilburg University, Tilburg Law and Economic Center.
  2. Chen, Shimin & Sun, Zheng & Tang, Song & Wu, Donghui, 2011. "Government intervention and investment efficiency: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 17(2), pages 259-271, April.
  3. Zheng, Ying & Zhu, Yuande, 2013. "Bank lending incentives and firm investment decisions in China," Journal of Multinational Financial Management, Elsevier, vol. 23(3), pages 146-165.
  4. Yan Leung Cheung & P. Raghavendra Rau & Aris Stouraitis, 2012. "How much do firms pay as bribes and what benefits do they get? Evidence from corruption cases worldwide," NBER Working Papers 17981, National Bureau of Economic Research, Inc.
  5. Rajeev Goel & Jelena Budak & Edo Rajh, 2012. "Factors Driving Bribe Payments: Survey Evidence from Croatia," Transition Studies Review, Springer, vol. 19(1), pages 13-22, September.
  6. Li, Kai & Yue, Heng & Zhao, Longkai, 2009. "Ownership, institutions, and capital structure: Evidence from China," Journal of Comparative Economics, Elsevier, vol. 37(3), pages 471-490, September.
  7. Sun, Pei & Xu, Haoping & Zhou, Jian, 2011. "The value of local political capital in transition China," Economics Letters, Elsevier, vol. 110(3), pages 189-192, March.
  8. Feng, Xunan & Johansson, Anders C. & Zhang, Tianyu, 2013. "Mixing Business with Politics: Political Participation by Entrepreneurs in China," Working Paper Series 2013-28, Stockholm China Economic Research Institute, Stockholm School of Economics.
  9. Jiang, Zhan & Kim, Kenneth A., 2013. "Financial management in China," Journal of Multinational Financial Management, Elsevier, vol. 23(3), pages 125-133.
  10. Johansson, Anders C. & Feng, Xunan, 2013. "The State Advances, the Private Sector Retreats: Firm Effects of China’s Great Stimulus Program," Working Paper Series 2013-25, Stockholm China Economic Research Institute, Stockholm School of Economics.

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