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

Posted: 17 Jan 2018 Last revised: 2 Sep 2021

See all articles by Eunhee Kim

Eunhee Kim

Baruch College, CUNY

Albert Mensah

HEC Paris - Accounting and Management Control Department

Cheong Yi

City University of Hong Kong (CityU) - 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

Baruch College, CUNY ( email )

55 Lexington Avenue
New York, NY 10010
United States

Albert Mensah (Contact Author)

HEC Paris - Accounting and Management Control Department

Jouy-en-Josas
France

HOME PAGE: http://https://www.hec.edu/en/faculty-research/faculty-directory/faculty-member/mensah-albert

Cheong Yi

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

83 Tat Chee Avenue
Kowloon
Hong Kong
China

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