The Agency Problem, Financial Performance and Corruption: Country, Industry and Firm Level Perspectives

Abstract

This paper studies the relationship between the agency problem, financial performance and corruption from country, industry and firm level perspectives. First, we observe that companies operating in countries with a high level of corruption tend to display relatively low returns. Second, in an industry-by-industry context, we find that the negative relationship between corruption and average stock returns is stronger in specific industries, which\ud we define as ‘corruption sensitive’. Third, at the firm level, we show that agency problems are exacerbated in corruption-sensitive industries. Our study builds on the existing literature in three main areas. First, it proposes a novel macro-based approach aimed at identifying corruption-sensitive industries. Second, it provides evidence supporting that corruption exacerbates agency conflicts. Third, it provides evidence on the generalizability of standard corporate governance predictions to companies operating in corruption-sensitive industries

Corruption, Corporate Social Responsibility and Financial Constraints: International Firm‐level Evidence

“…Firms that operate in a socially responsible manner would therefore be more interested in the sustainability of their activities rather than in short‐term benefits that could potentially result from corruption at the firm level (Donadelli et al ., ). According to the results, firms can lower their corruption risk by improving their CSR performance.…”

“…In line with Donadelli et al . (), Lambsdorff () as well as Lander and Auger (), who state that board independence improves stakeholder dialogue as well as reporting transparency and can thus lower corruption risk, it is controlled for board independence ( BOARD _ IND ). To measure board independence, it is considered whether the majority of board members are outside directors and whether the roles of chairman and CEO are split.…”

“…The finding that corruption and firm performance are associated is further supported by Donadelli et al . (). Quantifying corruption by the country‐level CCI they find that companies operating in countries with a relatively high level of corruption display weaker financial performance, as measured by stock returns.…”

“…Donadelli et al . () further argue that independent directors ensure external control over managers and internal directors thus reducing corruption risks and positively influencing a firm's performance especially in corruption‐sensitive industries. In particular, according to Wu () independent and competent corporate boards that truly represent shareholders’ interests prevent opportunistic behaviors of managers who might be tempted by the immediate gains from bribery.…”

“…Economic, political, and cultural factors have been identified as influencing corrupt activities on a country level (Mauro, 1997;Svensson, 2005). Yet firmlevel studies on the impact of firm-level factors on corruption are largely missing from the picture (Cosenz and Noto, 2014;de Jong and van Ees, 2014;Donadelli et al, 2014) or based on empirical analyses of corporate corruption in one single country (Carretta et al, 2012;de Jong et al, 2015;Luo, 2011;Nguyen and van Dijk, 2012;Ravenda et al, 2015). One reason for the focus on macro-rather than firm-level studies is the availability of corruption measurements.…”