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Local corruption and local stock returns

Author

Listed:
  • Serkan Karadas
  • William McAndrew
  • Minh Tam Tammy Schlosky

Abstract

Purpose - The purpose of this study is to investigate the effect of corruption on stock returns in the USA. In particular, this study examines the relationship between corruption in a state (i.e. local corruption) and stock returns of firms headquartered in that state (i.e. local returns). Design/methodology/approach - This paper uses the Fama–MacBeth two-step regressions. In the first step, the authors estimate the coefficients on the market, size, value and momentum factors for individual stocks. In the second step, they use those coefficients along with the corruption score of the state where stocks are headquartered to explain stock returns. Findings - This paper finds that corruption in a state adversely affects stock returns of firms headquartered in that state. It further documents that the effect of corruption on stock returns is limited to geographically concentrated firms. Originality/value - To the best of the authors’ knowledge, this paper is the first to document the effect of state-level corruption on individual stock returns in the USA using the Fama–MacBeth regressions. This study contributes to the literature by documenting the effect of local corruption on local stock returns in a low corruption country.

Suggested Citation

  • Serkan Karadas & William McAndrew & Minh Tam Tammy Schlosky, 2019. "Local corruption and local stock returns," Journal of Financial Crime, Emerald Group Publishing Limited, vol. 26(4), pages 1065-1077, October.
    • Handle: RePEc:eme:jfcpps:jfc-01-2018-0011
    DOI: 10.1108/JFC-01-2018-0011
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    Citations

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    Cited by:

    1. Fatemi, Darius & Kim, Jang-Chul, 2024. "Information asymmetry in non-US stocks: The compounding and mitigating effects of tax havens and corruption," Global Finance Journal, Elsevier, vol. 59(C).

    More about this item

    Keywords

    Local corruption; Local stock returns; Institutions; Justice; Political corruption; G10; G12; G18; D72; D73; K42;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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