Swimming Upstream: Struggling Firms in Corrupt Cities
36 Pages Posted: 19 Nov 2014 Last revised: 18 Apr 2018
Date Written: April 4, 2018
We find that a corrupt local environment amplifies the effects of financial distress. Following regional spikes in financial misconduct, credit becomes both more expensive and harder to obtain for nearby borrowers -- even those not implicated themselves. This is particularly harmful for cash-constrained firms, which cut investment more sharply and lay off more workers during industry downturns. Moreover, we find that local waves of financial misconduct are a risk factor for bankruptcy.
Keywords: financial misconduct, corporate failure, bankruptcy, loan spread, security issuance, trust
JEL Classification: G21, G32, G33, R30, J64
Suggested Citation: Suggested Citation