Does corrupt practice increase the implied cost of equity?

Abstract

We study the impact of a firm's corporate ethical failures on its implied cost of equity using a comprehensive firm-level data from 44 countries. We find that corrupt corporate behavior significantly leads to a higher implied cost of equity, and capital markets play a bigger role in disciplining corrupt firms when institutional quality is weak. Our results are robust with alternate specifications and measurements. Given the recent increase in policy uncertainty globally, we also examine whether the impact of corruption on the cost of equity depends on the level of global policy uncertainty. We show that corruption has a more significant impact on the cost of equity when policy uncertainty is high.