Implications of Public Corruption for Local Firms: Evidence from Corporate Debt Maturity

66 Pages Posted: 2 Apr 2021 Last revised: 28 Apr 2021

See all articles by M. Kabir Hassan

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

Md. Sydul Karim

University of New Orleans

Steven Kozlowski

Fairfield University

Date Written: February 14, 2021

Abstract

Using political corruption conviction data from the U.S. Department of Justice, we examine the impact of local corruption on firms’ debt maturity structure while exploring both demand-side and supply-side explanations. Our results support the demand-side story and indicate that firms located in high corruption areas utilize less short-term debt to mitigate liquidity and refinancing risks. Consistent with this, we find the effect is more pronounced among firms with smaller size, lower asset redeployability, and higher volatility. Our findings remain robust to the inclusion of an array of controls expected to influence debt maturity preferences as well as time, industry, and state fixed effects. Moreover, a seemingly unrelated regression approach, instrumental variables regression, propensity score matching, and placebo analyses corroborate our findings. Altogether, our results indicate that firms alter their debt maturity choices in response to local corruption to limit refinancing risk and the uncertainty created by corrupt government officials.

Keywords: Debt Maturity, Liquidity Risk, Cost of Debt, Political Corruption

JEL Classification: D73, G18, G32, G34

Suggested Citation

Hassan, M. Kabir and Karim, Md. Sydul and Kozlowski, Steven, Implications of Public Corruption for Local Firms: Evidence from Corporate Debt Maturity (February 14, 2021). Available at SSRN: https://ssrn.com/abstract=3802879 or http://dx.doi.org/10.2139/ssrn.3802879

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Md. Sydul Karim (Contact Author)

University of New Orleans ( email )

New Orleeans, LA
United States
2254474563 (Phone)

Steven Kozlowski

Fairfield University ( email )

Dolan School of Business
1073 North Benson Road
Fairfield, CT 06824
United States

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