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Sheltering Corporate Assets from Political Extraction

  • Lorenzo Caprio
  • Mara Faccio
  • John J. McConnell
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    We hypothesize that firms structure their asset holdings so as to shelter assets from extraction by politicians and bureaucrats. In countries where the threat of political extraction is higher, we hypothesize that firms hold a lower fraction of their assets in liquid form. Consistent with this conjecture, using data for over 30,000 firms across 109 countries, we find that corporate holdings of liquid assets are negatively correlated with measures of political corruption. Further, annual investment in property, plant, equipment, and inventory plus dividends is positively correlated with measures of political corruption suggesting that owners channel their cash into harder to extract assets. To the extent that the threat of political extraction moves firms away from their otherwise optimal levels of liquid assets, our findings suggest that the threat of political extraction may reduce economic development not only through the direct costs of political payoffs, but also because the potential for asset extraction moves firms away from their otherwise optimal asset holdings.

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    Paper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1240.

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    Length: 36
    Date of creation: Jun 2010
    Date of revision:
    Handle: RePEc:pur:prukra:1240
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    Web page: http://www.krannert.purdue.edu/programs/phd

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    1. Choi, Jay Pil & Thum, Marcel, 2003. "Corruption and the shadow economy," Dresden Discussion Paper Series in Economics 02/03, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
    2. Simon Johnson & Daniel Kaufmann & John McMillan & Christopher Woodruff, 2003. "Why Do Firms Hide? Bribes and Unofficial Activity after Communism," Public Economics 0308004, EconWPA.
    3. Dittmar, Amy & Mahrt-Smith, Jan & Servaes, Henri, 2003. "International Corporate Governance and Corporate Cash Holdings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(01), pages 111-133, March.
    4. Mo, Pak Hung, 2001. "Corruption and Economic Growth," Journal of Comparative Economics, Elsevier, vol. 29(1), pages 66-79, March.
    5. Clarke, George R. G. & Xu, Lixin Colin, 2004. "Privatization, competition, and corruption: how characteristics of bribe takers and payers affect bribes to utilities," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 2067-2097, August.
    6. Bliss, Christopher & Di Tella, Rafael, 1997. "Does Competition Kill Corruption?," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1001-23, October.
    7. Beata K. Smarzynska & Shang-Jin Wei, 2000. "Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence," NBER Working Papers 7969, National Bureau of Economic Research, Inc.
    8. Kim, Chang-Soo & Mauer, David C. & Sherman, Ann E., 1998. "The Determinants of Corporate Liquidity: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 335-359, September.
    9. Fan, Joseph P. H. & Morck, Randall & Lixin Colin Xu & Yeung, Bernard, 2007. "Does"good government"draw foreign capital ? Explaining China's exceptional foreign direct investment inflow," Policy Research Working Paper Series 4206, The World Bank.
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