Corruption and firm financial policies evidence from emerging market economies

Abstract

We examine the effect of corruption on firm financial policies (cash holdings, leverage newlineand debt maturity structure), firm value and cash value. We use a comprehensive newlinepanel data set of 4236 firm with 38763 firm year observations from 16 emerging newlinemarket economies and examine the results by using the fixed effects panel data newlineregression models. We find that the cash holdings are positively related to the newlinecorruption and by managing their cash holdings upwards, the firms can benefit newlinefrom the corrupt environment by trading cash. We also find a significant positive newlinerelationship between leverage, debt maturity structure and short-term debt. Overall, newlineour result do provide evidence that the firms operating in the corrupt environment newlinetend to use more debt in order to shield their asset from getting expropriated. Also newlinethe use of short-term debt financing is even more when the corrupt environment is newlinecomplemented by weak investor protection in the economy. Finally, we examine the effect of corruption on firm value and cash value. We newlinefind a negative relationship between the firm value and corruption. With respect newlineto cash value, our result do provide evidence that the cash holdings does add value newlineto the firm. However, this relationship is affected by the institutional factors like newlinecorruption and investor protection. The value effect of cash is not significant when newlinethe firms are operating in an environment of high corruption with low investor newlineprotection. These results are also robust to the alternate measure of corruption newlineand dependent variables. Overall, the evidence suggests that the market frictions newlinelike corruption plays an important role in shaping the financial policies of the firms.