Corruption Along Supply-Chain Networks

Abstract

I study how the corporate corruption culture of foreign suppliers and customers influences the propensity and magnitude of financial misconducts of US corporations. Using the World Bank Corruption Control Index, I find that firms connected to customers( suppliers) from countries with higher corruption culture are more likely to engage in financial misconduct, earnings management, and option backdating. I find that both the selection channel, where US firms with weaker corporate governance choose customers( suppliers) with high corruption culture, and the propagation channel, where the corruption cultures of foreign customers and suppliers influence US firms, explain the magnitude of the effects.

Keywords: corporate governance; trade networks; financial misconduct

JEL Classification: G30, G34.