Collusive versus Coercive Corporate Corruption: Evidence from Demand-Side Shocks and Supply-Side Disclosures

Posted: 24 Sep 2019 Last revised: 31 Dec 2020

See all articles by Jeong-Bon Kim

Jeong-Bon Kim

City University of Hong Kong

Edward Lee

University of Manchester - Alliance Manchester Business School

Xiaojian Tang

College of Finance, Nanjing Agricultural University

Junsheng Zhang

Business School, Sun Yat-sen University

Date Written: August 1, 2019

Abstract

We examine if corruption-related expenses derived from mandatory accounting disclosure convey useful information on the exposure of firms to external political risk associated with collusive and coercive corporate corruption. Our identification strategy exploits (i) the unique mandatory disclosure of entertainment and travel costs (ETC) by Chinese firms, and (ii) the exogenous criminal prosecutions of regional government officials in China’s anti-corruption campaign. Among state (privately) owned enterprises, in which corruption is more likely to be collusive (coercive), we find that alleged bribery expenditures measured by abnormal ETC have a significantly negative (positive) relation with market reactions to the anti-corruption prosecutions, especially for firms in greater government intervention regions (business competition industries). These findings are consistent with investors’ anticipation of the future decline in potential benefit (cost) that arise from collusive (coercive) corruption among more (less) politically connected firms, and suggest that abnormal ETC are informative regarding firms’ exposure to corruption-related political risk. Our study has an important policy implication relevant to the international call for a greater role of accounting in the fight against corruption.

Keywords: mandatory accounting disclosure, corporate corruption, market reactions, political risk

JEL Classification: L50, G38

Suggested Citation

Kim, Jeong-Bon and Lee, Edward and Tang, Xiaojian and Zhang, Junsheng, Collusive versus Coercive Corporate Corruption: Evidence from Demand-Side Shocks and Supply-Side Disclosures (August 1, 2019). Available at SSRN: https://ssrn.com/abstract=3453690

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Edward Lee

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

Xiaojian Tang

College of Finance, Nanjing Agricultural University ( email )

No. 1 Weigang Road, Xuanwu District,Nanjing city,
Nanjing, Jiangsu 210095
China

Junsheng Zhang (Contact Author)

Business School, Sun Yat-sen University ( email )

135, Xingang Xi Road
Guangzhou, Guangdong 510275
China

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