DP12094 To bribe or not to bribe? Corruption uncertainty and corporate practices

Author(s): Jan Hanousek, Anastasiya Shamshur, Jiri Tresl
Publication Date: June 2017
Keyword(s): cash holdings, corporate investment, Corruption, Europe, firms, panel data, uncertainty
JEL(s):
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12094

Using a large sample of private firms over the period from 2001 to 2013, we study the effect of corruption uncertainty on corporate investments and cash holdings. We find that a higher uncertainty about the level of corruption is associated with lower corporate investments and lower cash holdings. These results are sensitive to the ownership structure of a firm. Firms with no foreign majority ownership appear to be more sensitive to corruption-induced uncertainty than majority-controlled foreign firms. They significantly decrease their investments and cash holdings. We hypothesize that they move their cash off-balance-sheet to create cash reserves as the uncertainty of when, whom, and how much to bribe increases.