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Greasing the wheels of irreversible investment: International evidence on the economic effects of corruption

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  • Yung, Kenneth
  • Cai, Qiuye
  • Li, Deqing Diane

Abstract

Firm- and industry-specific investments are irreversible. Irreversibility makes investment more sensitive to risk. Firms are reluctant to engage in irreversible investment (IRRE) in the face of uncertainty. Corruption provides firms with a mechanism to grease the wheels of irreversible projects. In this study, corruption is proxied by the corruption perception index (CPI). Low levels of perceived corruption (i.e., high CPI scores) imply limited access to the benefits of greasing wheels. We find a significant negative relationship between IRRE and CPI in this study. Our baseline regression results remain consistent after a battery of robustness checks. We also find that the negative relationship between IRRE and CPI is elevated (mitigated) when uncertainty is high (low). In addition, the negative relationship is moderated (elevated) if tolerance of uncertainty is high (low). An additional analysis finds results suggesting that information transparency mitigates country-level uncertainty and thus offers a viable mechanism to counter corruption.

Suggested Citation

  • Yung, Kenneth & Cai, Qiuye & Li, Deqing Diane, 2023. "Greasing the wheels of irreversible investment: International evidence on the economic effects of corruption," Global Finance Journal, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:glofin:v:58:y:2023:i:c:s104402832300090x
    DOI: 10.1016/j.gfj.2023.100895
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