The Externalities of Corruption: Evidence from Entrepreneurial Firms in China

70 Pages Posted: 13 Jan 2017 Last revised: 3 Nov 2020

See all articles by Mariassunta Giannetti

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Guanmin Liao

Renmin University of China - School of Business

Jiaxing You

Xiamen University

Xiaoyun Yu

Indiana University Kelley School of Business; European Corporate Governance Institute (ECGI); China Academy of Financial Research (CAFR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 25, 2020

Abstract

Exploiting China’s anti-corruption campaign, we show that following a decrease in corruption, firm performance improves. Small and young firms benefit more. We identify the channels through which corruption hampers firm performance. Following the anti-corruption campaign, the allocation of capital and labor becomes more efficient. Firms operating in ex ante more corrupt environments experience larger productivity gains, higher growth of sales, and lower cost of debt than other firms. Taken together, our results suggest that corruption is an inefficient equilibrium for an economy because it creates negative externalities.

Keywords: corruption, corporate governance, capital and labor allocation, China

JEL Classification: D22, D62, G30, L20, O12, P26

Suggested Citation

Giannetti, Mariassunta and Liao, Guanmin and You, Jiaxing and Yu, Xiaoyun, The Externalities of Corruption: Evidence from Entrepreneurial Firms in China (October 25, 2020). Review of Finance, forthcoming , Kelley School of Business Research Paper No. 17-6, European Corporate Governance Institute (ECGI) - Finance Working Paper No. 536/2017, Swedish House of Finance Research Paper No. 17-6, Available at SSRN: https://ssrn.com/abstract=2897558 or http://dx.doi.org/10.2139/ssrn.2897558

Mariassunta Giannetti

Stockholm School of Economics ( email )

P.O. Box 6501
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+46 8 736 9607 (Phone)
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HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
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Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

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111 60 Stockholm
Sweden

Guanmin Liao

Renmin University of China - School of Business ( email )

No. 59 Zhongguancun Street, Haidian District
Beijing, Beijing 100872
China

Jiaxing You

Xiamen University ( email )

Xiamen, Fujian 361005
China

Xiaoyun Yu (Contact Author)

Indiana University Kelley School of Business ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3521 (Phone)
812-855-5875 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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