The Effects of Corruption on Capital Structure: When Does it Matter?

31 Pages Posted: 13 Mar 2013

See all articles by Mufaddal H. Baxamusa

Mufaddal H. Baxamusa

University of St. Thomas

Abu Jalal

Suffolk University - Sawyer School of Management

Date Written: March 12, 2013

Abstract

We study the effects of corruption on the capital structures of firms in 72 countries. Using the Corruption Perception Index, we show that corruption increases the costs of debt and equity. Interestingly, as the level of corruption decreases, these costs become more sensitive to changes in corruption. Similarly, the capital structure adjustment speeds exhibit a non-linear dynamic. These results indicate that for the most corrupt countries, it is necessary to engage in corruption reduction efforts to get past a minimum threshold before they can affect the behaviors of firms. Additionally, the least corrupt countries need to remain vigilant against increases in corruption.

Keywords: Corruption, Cost of Debt, Cost of Equity, Capital Structure

JEL Classification: D73, G32

Suggested Citation

Baxamusa, Mufaddal H. and Jalal, Abu, The Effects of Corruption on Capital Structure: When Does it Matter? (March 12, 2013). Available at SSRN: https://ssrn.com/abstract=2232162 or http://dx.doi.org/10.2139/ssrn.2232162

Mufaddal H. Baxamusa (Contact Author)

University of St. Thomas ( email )

1000 LaSalle Ave.
Minneapolis, MN 55403
United States

Abu Jalal

Suffolk University - Sawyer School of Management ( email )

Boston, MA 02108
United States

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