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
Date Written: January 16, 2018
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: Suggested Citation