Equilibrium Consequences of Corruption on Firms: Evidence from China's Anti-Corruption Campaign

56 Pages Posted: 13 Jan 2020 Last revised: 1 Nov 2021

See all articles by Haoyuan Ding

Haoyuan Ding

Shanghai University of Finance and Economics - School of International Business Administration

Hanming Fang

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Shu Lin

Department of Economics, The Chinese University of Hong Kong

Kang Shi

The Chinese University of Hong Kong (CUHK) - Department of Economics

Date Written: January 2020

Abstract

We use China's recent anti-corruption campaign as a natural experiment to examine the (market expected) equilibrium consequences of (anti-)corruption. We argue that the announcement of inspections of provincial governments by the Central Commission for Discipline Inspection (CCDI) on May 17, 2013 represents a significant departure of past norms of anti-corruption campaigns, and thus serves a rare empirical opportunity to examine the equilibrium effects of anti-corruption campaigns for firms. We first present a conceptual framework to illustrate the channels through which anti-corruption actions can influence firms. Using an event study approach and May 17, 2013 as the event date, we find that, overall, the stock market responded positively to the announcement of strong anti-corruption actions. The announcement returns are significantly lower for luxury-goods producers, and SOES, large firms, or politically connected firms earn lower returns than private, small, or non-connected firms. We also find that existing local institutions play a crucial role in determining the announcement returns across firms. Moreover, a long-term difference-in-differences analysis shows that higher returns during the event window are associated with more subsequent entries of new firms and faster expansions of existing firms. Finally, we also provide direct evidence consistent with the endogenous grits effect.

Suggested Citation

Ding, Haoyuan and Fang, Hanming and Lin, Shu and Shi, Kang, Equilibrium Consequences of Corruption on Firms: Evidence from China's Anti-Corruption Campaign (January 2020). Available at SSRN: https://ssrn.com/abstract=3518268

Haoyuan Ding (Contact Author)

Shanghai University of Finance and Economics - School of International Business Administration ( email )

777 Guo-ding Road
Shanghai, 200433
China

Hanming Fang

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shu Lin

Department of Economics, The Chinese University of Hong Kong ( email )

Department of Economics
The Chinese University of Hong Kong
Shatin, N.T., 200433
Hong Kong

Kang Shi

The Chinese University of Hong Kong (CUHK) - Department of Economics ( email )

Shatin, N.T.
Hong Kong

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