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The Externalities of Corruption: Evidence from Entrepreneurial Firms in China

Author

Listed:
  • Mariassunta Giannetti
  • Guanmin Liao
  • Jiaxing You
  • Xiaoyun Yu

Abstract

Exploiting China’s anti-corruption campaign, we show that following a decrease in corruption, firm performance improves. Small and young firms benefit more. We identify the channels through which corruption hampers firm performance. Following the anti-corruption campaign, the allocation of capital and labor becomes more efficient. Firms operating in ex ante more corrupt environments experience larger productivity gains, higher growth of sales, and lower cost of debt than other firms. Taken together, our results suggest that corruption is an inefficient equilibrium for an economy because it creates negative externalities.

Suggested Citation

  • Mariassunta Giannetti & Guanmin Liao & Jiaxing You & Xiaoyun Yu, 2021. "The Externalities of Corruption: Evidence from Entrepreneurial Firms in China," Review of Finance, European Finance Association, vol. 25(3), pages 629-667.
    • Handle: RePEc:oup:revfin:v:25:y:2021:i:3:p:629-667.
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    File URL: http://hdl.handle.net/10.1093/rof/rfaa038
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    More about this item

    Keywords

    Corruption; Corporate governance; Capital and labor allocation; China;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • P26 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Property Rights

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