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Political Corruption and Corporate Risk-Taking

Author

Listed:
  • Hinh Khieu

    (Prairie View A&M University)

  • Nam H. Nguyen

    (University of Texas Rio Grande Valley)

  • Hieu V. Phan

    (University of Massachusetts Lowell)

  • Jon A. Fulkerson

    (University of Dayton)

Abstract

We use variation in corruption convictions across judicial districts in the US to examine the relationship between political corruption and risk-taking of public firms. Firms headquartered in regions with high levels of political corruption have lower total risk and lower idiosyncratic risk on average. Further analysis shows that corruption tends to encourage firms to pursue risk-decreasing investments, lower the riskiness of their operations, and decrease asset liquidity. While managerial ownership is intended to align the interests of managers and shareholders, the presence of corruption appears to encourage undiversified managers to decrease risk-taking. Our evidence is consistent with agency theory and the asset-shielding argument that political corruption discourages managers from taking risks that expose firms to expropriation by politicians, resulting in suboptimal corporate policies.

Suggested Citation

  • Hinh Khieu & Nam H. Nguyen & Hieu V. Phan & Jon A. Fulkerson, 2023. "Political Corruption and Corporate Risk-Taking," Journal of Business Ethics, Springer, vol. 184(1), pages 93-113, April.
    • Handle: RePEc:kap:jbuset:v:184:y:2023:i:1:d:10.1007_s10551-022-05136-8
    DOI: 10.1007/s10551-022-05136-8
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    1. Seyed Ashkan Zarghami, 2024. "The Labyrinth of Corruption in the Construction Industry: A System Dynamics Model Based on 40 Years of Research," Journal of Business Ethics, Springer, vol. 195(2), pages 335-352, November.

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    More about this item

    Keywords

    Political corruption; Risk-taking; Systematic risk; Idiosyncratic risk; Investment; Capital structure; Liquidity; Operating leverage;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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