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Corruption risk and stock market effects: Evidence from the defence industry

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  • Krishnamurti, Chandrasekhar
  • Pensiero, Domenico
  • Velayutham, Eswaran

Abstract

Motivated by the finding that corruption is rampant in the defence sector globally, we examine the stock market effects of firm-level corruption risk disclosure in the defence industry. We find that the disclosure of corruption risk scores have information content. Our multivariate tests show that the market reacts negatively to firms that have low corruption risk. Our study supports the ‘greasing the wheels’ hypothesis which suggests that corruption is a cost of doing business. Further, companies with low corruption risk experience lower stock price volatility after the disclosure of corruption risk scores. Finally, we also find that the disclosure of lower corruption risk is associated with an increase in firm-level market liquidity.

Suggested Citation

  • Krishnamurti, Chandrasekhar & Pensiero, Domenico & Velayutham, Eswaran, 2021. "Corruption risk and stock market effects: Evidence from the defence industry," Pacific-Basin Finance Journal, Elsevier, vol. 70(C).
    • Handle: RePEc:eee:pacfin:v:70:y:2021:i:c:s0927538x21001888
    DOI: 10.1016/j.pacfin.2021.101681
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    1. Eleni Zafeiriou & Alexandros Garefalakis & Ioannis Passas & Konstantina Ragazou, 2023. "Illicit and Corruption Mitigation Strategy in the Financial Sector: A Study with a Hybrid Methodological Approach," Sustainability, MDPI, vol. 15(2), pages 1-16, January.

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    More about this item

    Keywords

    Corruption risk; Stock market reaction; Information asymmetry; Market liquidity;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption

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