We propose and investigate a new channel through which the resource curse - a stylized fact that countries rich in natural resources grow slower - operates. Predatory governments are more likely to expropriate corporate profits in natural-resource industries when the price of resources is higher. Corporations whose profits are more dependent on the price of resources can mitigate the risk of expropriation by reducing corporate transparency. Lower transparency, in turn, leads to inefficient capital allocation and slower economic growth. Using a panel of 72 industries from 51 countries over 16 years, we demonstrate that the negative effect of expropriation risk on corporate transparency is stronger for industries that are especially vulnerable to expropriation, in particular, for industries whose profits are highly correlated with oil prices. Controlling for country, year, and industry fixed effects, we find that corporate transparency is lower in more oil price-dependent industries when the price of oil is high and property rights are poorly protected. Furthermore, corporate growth is hampered in oil price-sensitive industries because of less efficient capital allocation driven by adverse effects of lower transparency.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
6547.
Find related papers by JEL classification: G15 - Financial Economics - - General Financial Markets - - - International Financial Markets G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law L7 - Industrial Organization - - Industry Studies: Primary Products and Construction O43 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
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Maria Boutchkova & Hitesh Doshi & Art Durnev & Alexander Molchanov, 2007.
"Politics and Volatility,"
CEI Working Paper Series
2008-10, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
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