Corruption and financial fragility of small and medium enterprises: International evidence

Abstract

This paper examines the effect of corruption on the financial fragility of small and medium enterprises (SMEs) across 62 countries over the period from 2012 to 2018. We also evaluate how economic freedom and press freedom affect the association between corruption and corporate financial fragility. We find evidence that an increase in the degree of corruption is positively correlated with the financial fragility of SMEs in developing countries. In contrast, we show no evidence that corruption is significantly associated with the financial fragility of firms in developed countries. Furthermore, we find that the adverse impact of corruption on firm financial fragility is more pronounced in countries with less economic freedom. Our results also reveal that firms in countries with greater press freedom can better mitigate the negative impact of corruption on their risks than firms in countries with lower levels of independent press. Econometrically, our findings still hold even after controlling for dynamic endogeneity, simultaneity, and unobserved time-invariant heterogeneity, inherent in the corruption–corporate fragility relationship.