The Externalities of Corruption: Evidence from Entrepreneurial Firms in China

Mariassunta Giannetti · Guanmin Liao · Jiaxing You · Xiaoyun Yu

192 citations0/0 files storedEuropean Finance Review

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Corruption and Economic Development Corporate Finance and Governance Political Influence and Corporate Strategies

Abstract

Abstract 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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References

1970Political Order in Changing Societies 2003Estimating Production Functions Using Inputs to Control for Unobservables 1969Political Order in Changing Societies.2005Law, finance, and economic growth in China 2009Misallocation and Manufacturing TFP in China and India *2006Politically Connected Firms 1993Corruption 2001Estimating the Value of Political Connections

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