Collusive versus Coercive Corporate Corruption: Evidence from Demand-Side Shocks and Supply-Side Disclosures
Posted: 24 Sep 2019 Last revised: 31 Dec 2020
Date Written: August 1, 2019
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: Suggested Citation