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The effects of corruption on capital structure: when does it matter?

Author

Listed:
  • Mufaddal Baxamusa

    (University of St Thomas, USA)

  • Abu Jalal

    (Suffolk University, USA)

Abstract

We study the effects of corruption on the capital structures of firms in 72 countries. Using the Corruption Perception Index, we show that corruption increases the costs of debt and equity. Interestingly, as the level of corruption decreases, these costs become more sensitive to changes in corruption. Similarly, the capital structure adjustment speeds exhibit a non-linear dynamic. These results indicate that for the most corrupt countries, it is necessary to engage in corruption reduction efforts to get past a minimum threshold before they can affect the behaviors of firms. Additionally, the least corrupt countries need to remain vigilant against increases in corruption.

Suggested Citation

  • Mufaddal Baxamusa & Abu Jalal, 2014. "The effects of corruption on capital structure: when does it matter?," Journal of Developing Areas, Tennessee State University, College of Business, vol. 48(1), pages 315-335, January-M.
    • Handle: RePEc:jda:journl:vol.48:year:2014:issue1:pp:315-335
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    Citations

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    Cited by:

    1. Tran, Quoc Trung & Nguyen, Van Phong & Dang, Duong Huy Chuong & Nguyen, Ba Phong & Le, Phuong Linh, 2023. "Local corruption and capital structure," Finance Research Letters, Elsevier, vol. 55(PB).
    2. Anh‐Tuan Doan & Bich‐Thanh Truong & Chi‐Cuong Nguyen & Phan‐Tam‐Nhu Nguyen & Hai‐Yen Truong & Anh‐Tuan Le, 2023. "Corruption and corporate leverage in an emerging economy: The role of economic freedom," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 94(2), pages 599-629, June.
    3. Min Bai & Samir Harith, 2023. "Measuring SMEs Risk – Evidence from Malaysia," SN Business & Economics, Springer, vol. 3(7), pages 1-32, July.
    4. Hassan, M. Kabir & Karim, Md. Sydul & Kozlowski, Steven E., 2022. "Implications of public corruption for local firms: Evidence from corporate debt maturity," Journal of Financial Stability, Elsevier, vol. 58(C).
    5. Thao Nguyen & Min Bai & Greg Hou & Cameron Truong, 2022. "Drought risk and capital structure dynamics," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(3), pages 3397-3439, September.

    More about this item

    Keywords

    Corruption; Cost of Debt; Cost of Equity; Capital Structure;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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