DP14341 Corporate Profitability and the Global Persistence of Corruption

Author(s): Stephen Ferris, Jan Hanousek, Jiri Tresl
Publication Date: January 2020
Keyword(s): Central and Eastern Europe, Corruption, Inefficiency, Performance, Private firms
JEL(s): F38, G30
Programme Areas: Financial Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14341

We examine the persistence of corporate corruption for a sample of privately-held firms from 12 Central and Eastern European countries over the period 2001 to 2015. Creating a proxy for corporate corruption based on a firm's internal inefficiency, we find that corruption enhances a firm's profitability. A channel analysis further reveals that inflating staff costs is the most common approach by which firms divert funds to finance corruption. We conclude that corruption persists because of its ability to improve a firm's return on assets, which we refer to as the Corporate Advantage Hypothesis.