The Externalities of Corruption: Evidence from Entrepreneurial Activity in China

67 Pages Posted: 9 Oct 2017

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 2017

Abstract

We show that corruption affects negatively the performance of small entrepreneurial firms, which compete with corrupted industry peers. We exploit the Chinese anti-corruption campaign to establish causality and identify the channels through which corruption causes negative externalities. Small firms have lower sales growth in industries with high corruption, arguably because demand is diverted to the largest firms in their industries, which spend more in corrupting officials. Small firms also have higher financing costs in industries with high corruption and therefore invest less. Furthermore, corruption decreases the efficiency of labor and capital allocation and deters firm entry.

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

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 Activity in China (October 2017). CEPR Discussion Paper No. DP12345, Available at SSRN: https://ssrn.com/abstract=3049901

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
Sveavagen 65
SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)

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
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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

Swedish House of Finance ( email )

Drottninggatan 98
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

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
760
PlumX Metrics