Public Governance and Corporate Finance: Evidence from Corruption Cases

56 Pages Posted: 10 Mar 2006 Last revised: 15 Jun 2013

See all articles by Joseph P. H. Fan

Joseph P. H. Fan

The Chinese University of Hong Kong (CUHK) - School of Accountancy

Oliver M. Rui

China Europe International Business School (CEIBS)

Mengxin Zhao

Securities and Exchange Commission (SEC)

Date Written: April 1, 2008

Abstract

Cross-sectional research finds that corporate financing choices are not only affected by firm and industry factors, but also by country institutional factors. This study focuses on the roles of public governance in firm financing patterns. To conduct a natural experiment that avoids endogeneity, we identify 23 corruption scandals involving high-level government bureaucrats in China and a set of publicly traded companies whose senior managers bribed bureaucrats or were connected with bureaucrats through previous job affiliations. We report a significant decline in the leverage and debt maturity ratios of these firms relative to those of other unconnected firms after the arrest of the corrupt bureaucrat in question. These relations persist even if we only focus on the connected firms that were not directly involved in the corruption cases. The relative decline in firm leverage is associated with negative stock price effects. We also examine the possibility that rent seekers are efficient firms and that corruption does not thus result in capital misallocation, but fail to find evidence to substantiate this postulation.

Keywords: Public governance, Corruption, Rent seeking, Regulated firms, Corporate finance, Capital structure, China

JEL Classification: D23, G32, G38, K42, P26, P31

Suggested Citation

Fan, Po Hung Joseph P. H. and Rui, Oliver M. and Zhao, Mengxin, Public Governance and Corporate Finance: Evidence from Corruption Cases (April 1, 2008). Journal of Comparative Economics, Vol. 36, No. 3, 2008. Available at SSRN: https://ssrn.com/abstract=877627 or http://dx.doi.org/10.2139/ssrn.877627

Po Hung Joseph P. H. Fan (Contact Author)

The Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )

Shatin, N.T.
Hong Kong
(852) 26097839 (Phone)
(852) 26035114 (Fax)

Oliver M. Rui

China Europe International Business School (CEIBS) ( email )

699 Hong Feng Road
Pudong
Shanghai 201206
China
86-21-28905618 (Phone)
86-21-28905620 (Fax)

Mengxin Zhao

Securities and Exchange Commission (SEC) ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States

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