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Corruption and International Valuation: Does Virtue Pay?

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  • Charles, Lee
  • David, Ng

Abstract

Using firm-level data from 44 countries, we investigate the relation between corruption and international corporate values. Our analysis shows that firms from more corrupt countries trade at significantly lower market multiples. The effect is both economically and statistically significant. Furthermore, using a two-stage estimation procedure, we show that corruption impacts firm value primarily through lower expected future cash flows, most directly captured by firms’ profitability forecasts. Collectively, our evidence shows corruption has significant economic consequences for shareholder value.

Suggested Citation

  • Charles, Lee & David, Ng, 2002. "Corruption and International Valuation: Does Virtue Pay?," MPRA Paper 590, University Library of Munich, Germany, revised Oct 2006.
  • Handle: RePEc:pra:mprapa:590
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    References listed on IDEAS

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    Cited by:

    1. Shang-Jin Wei & R. G Gelos, 2002. "Transparency and International Investor Behavior," IMF Working Papers 02/174, International Monetary Fund.
    2. Wisniewski, Tomasz Piotr, 2016. "Is there a link between politics and stock returns? A literature survey," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 15-23.
    3. Mellati, Ali, 2008. "Uncertainty and investment in private sector: An analytical argument and a review of the economy of Iran," MPRA Paper 26655, University Library of Munich, Germany.
    4. Jochem Axel, 2010. "International Financial Competitiveness and Incentives to Foreign Direct Investment," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 230(1), pages 42-58, February.
    5. Kim, Huong Trang & Papanastassiou, Marina & Nguyen, Quang, 2017. "Multinationals and the impact of corruption on financial derivatives use and firm value: Evidence from East Asia," Journal of Multinational Financial Management, Elsevier, vol. 39(C), pages 39-59.
    6. Mehmet Balcilar & Riza Demirer & Rangan Gupta, 2017. "Do Sustainable Stocks Offer Diversification Benefits for Conventional Portfolios? An Empirical Analysis of Risk Spillovers and Dynamic Correlations," Sustainability, MDPI, Open Access Journal, vol. 9(10), pages 1-18, October.
    7. Chua, Choong Tze & Eun, Cheol S. & Lai, Sandy, 2007. "Corporate valuation around the world: The effects of governance, growth, and openness," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 35-56, January.

    More about this item

    Keywords

    corruption; international valuation; market multiple;

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G3 - Financial Economics - - Corporate Finance and Governance

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