Shielding from Political Corruption and the Choice between Public and Private Debt: Theory and Evidence

70 Pages Posted: 17 Jan 2018 Last revised: 27 Mar 2018

See all articles by Eunhee Kim

Eunhee Kim

City University of Hong Kong (CityUHK)

Albert Mensah

City University of Hong Kong (CityUHK)

Cheong Yi

City University of Hong Kong (CityUHK) - Department of Accountancy

Date Written: January 16, 2018

Abstract

Based on a simple model of debt choice, we investigate how firms increase their leverage when they face high expropriation risk. Due to timely observability of public debt, we find that firms choose public over private debt when public corruption surges, suggesting that public debt is useful in deterring a corrupt public official’s potential expropriation. Cross-sectional variation tests reveal that firms’ shielding behavior tends to be stronger for firms with enormous resources, and those having external and internal governance mechanisms in place. The results are robust to the use of alternative specifications and proxies, accounting for potentially omitted state-level confounds, and the use of instrumental variable analysis, propensity score matching estimation and a quasi-natural experiment based on high-profile corruption-related political scandals. Our study is incremental to literature on the determinants of debt choice, public debt as a communication device, and corporate disclosure relating to debt.

Keywords: Political Corruption, Corporate Disclosure, Public and Private Debt

JEL Classification: G31, G32, G38, D72

Suggested Citation

Kim, Eunhee and Mensah, Albert and Yi, Cheong, Shielding from Political Corruption and the Choice between Public and Private Debt: Theory and Evidence (January 16, 2018). 2018 Canadian Academic Accounting Association (CAAA) Annual Conference. Available at SSRN: https://ssrn.com/abstract=3103481 or http://dx.doi.org/10.2139/ssrn.3103481

Eunhee Kim

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Albert Mensah (Contact Author)

City University of Hong Kong (CityUHK) ( email )

Kowloon
Hong Kong
+852 53162520 (Phone)

Cheong Yi

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
60
Abstract Views
709
rank
370,445
PlumX Metrics