Should One Hire a Corrupt CEO in a Corrupt Country?

Abstract:     
This paper examines the interaction between propensity to corrupt (PTC) and firm performance. First, I use unique data from Moscow traffic violations to build an individual measure of PTC for every Muscovite with a driver’s license (3.1 million people). Next, I determine the PTC for the management of 58,157 privately held firms. I find that a one standard deviation increase in company management PTC corresponds to a 3.4% increase in income diversion. I also find that corrupt managers pay a higher portion of salaries under the table. A one standard deviation increase in PTC is associated with a 7% increase in undeclared employee income at a firm. Finally, I document that firms with corrupt management significantly outperform firms with not corrupt management. A one standard deviation increase in firm management PTC is associated with a 2.2% increase in the annual revenue growth rate and a 3.9% increase in revenue per employee. However, this effect is not present in foreign-owned firms.

Number of Pages in PDF File: 36

Keywords: Corruption, tax evasion, CEO, firm performance, corporate governance

JEL Classification: D73, G30, G34, G38, H11, H26

working papers series