Low Corruption Research Articles

Real Effects of PCAOB International Inspections

ABSTRACT This paper examines the effect of the Public Company Accounting Oversight Board (PCAOB) international inspection program on companies' financing and investing decisions. Difference-in-differences regression estimates suggest that companies respond to their auditor receiving a “deficiency-free” inspection report by issuing additional external capital amounting to 1.4 percent of assets and increasing investment by 0.5 percent of assets. These effects are larger for (1) financially constrained companies and (2) companies located in countries where there is no regulator or the regulator does not conduct inspections. Further, the effect on financing decisions is stronger in countries with (1) low corruption, (2) strong rule of law, and (3) high regulatory quality. Descriptive evidence suggests that inspections increase the use of financial covenants in debt contracts, which is likely one of the mechanisms through which inspections generate real effects. This paper documents the value of PCAOB inspections in mitigating financing frictions for non-U.S. companies. JEL Classifications: D8; D25; G15; G31; G38; M4; M41; M42. Data Availability: Data are available from the public sources cited in the text.

Trust, regulation, and redistribution why some governments overregulate and under‐redistribute

AbstractFor many social scientists, government intervention is linked to low levels of social trust and corruption, while others associate it with high trust and low corruption. We aim to reconcile these contrasting views by distinguishing the opposing effects of trust on two alternative types of government intervention: regulation and redistribution. We argue that distrusting individuals demand more governmental regulation (H1) but less government redistribution (H2), and this could be one of the mechanisms explaining why countries with low levels of trust tend to both overregulate and under‐redistribute. And the effects of trust on policy preferences are conditional on the quality of institutions. The higher the level of quality of government in a particular region, the more high‐trusting individuals will like government redistribution and dislike government regulation that restricts the operations of free markets (H3). We test these hypotheses with data from the latest round of the European Quality of Government Index (EQI) survey, which covers 77,000 individuals from 185 regions of 21 EU member states.

Post Materialism and Comparative Economic Development: Do Institutions Act as Transmission Channel?

Although a growing number of countries are experiencing structural societal changes characterised by an increased prominence of post materialistic societal goals and personal values, there is limited empirical evidence on the economic effects of post materialism. In this paper, we address this gap in the literature by estimating the effect of post materialism on the level of economic development for a heterogeneous set of countries. Furthermore, in line with the notion that institutions may act as transmission channel of economic effects of social values, we estimate whether institutions transmit indirect effects from post materialism. Our findings show that post materialism and institutions both generate sizeable effects on economic development. Institutions create consistent positive effects. The effect of post materialism consists of a negative direct effect and a larger positive indirect effect transmitted via institutions related to personal freedom, a solid regulatory framework and low corruption. These findings reflect the importance of accounting for the effects of social values such as post materialism and institutions as well as their interrelationship to identify more fully their impact on economic development.

Local corruption and local stock returns

PurposeThe purpose of this study is to investigate the effect of corruption on stock returns in the USA. In particular, this study examines the relationship between corruption in a state (i.e. local corruption) and stock returns of firms headquartered in that state (i.e. local returns).Design/methodology/approachThis paper uses the Fama–MacBeth two-step regressions. In the first step, the authors estimate the coefficients on the market, size, value and momentum factors for individual stocks. In the second step, they use those coefficients along with the corruption score of the state where stocks are headquartered to explain stock returns.FindingsThis paper finds that corruption in a state adversely affects stock returns of firms headquartered in that state. It further documents that the effect of corruption on stock returns is limited to geographically concentrated firms.Originality/valueTo the best of the authors’ knowledge, this paper is the first to document the effect of state-level corruption on individual stock returns in the USA using the Fama–MacBeth regressions. This study contributes to the literature by documenting the effect of local corruption on local stock returns in a low corruption country.

New evidence on corruption and government debt from a global country panel

PurposeThe purpose of this paper is to explore the link between corruption and government debt through a regime-based approach.Design/methodology/approachThe empirical analysis makes use of a panel of 120 countries, spanning the period 1999–2015. The study makes use of the Panel Smooth Transition Regression (PSTR) methodological approach, as well as two alternative measures of corruption.FindingsThe empirical results document that the relationship between corruption and debt is non-linear, while a strong threshold effect was present as well. Public debt appears to respond faster to a high corruption regime compared to a low corruption regime, while an increase in the size of the shadow economy, government expenses, the inflation rate, interest payments on debt and military expenditure all increased the debt to GDP ratio. By contrast, an increase in GDP per capita, the secondary school enrollment ratio and the ratio of tax revenues to GDP led to a fall in the debt to GDP ratio. The findings survive certain robust checks when the role of the 2008 financial crisis is explicitly considered, as well as when two separate country samples were considered, i.e. developed vs developing countries.Practical implicationsGovernments should aim to control both corruption and the size of the shadow economy if they really wish to reduce any high levels of their public debt. As debt levels respond faster to high corruption regimes, it is necessary that measures to reduce corruption are complemented by higher GDP per capita growth rates, enrolment rates and higher tax revenues.Originality/valueThe novelty of the paper is that it investigates for the first time, to the best of the authors’ knowledge, the presence of non-linearity between corruption and government debt. It proposes non-linear panel cointegration and causality tests, as well as a non-linear panel error correction model that allows for smooth changes between regimes, hence, examining causal relationships in each regime separately.

The Impact of social infrastructures on economic growth of Sub-Saharan Africa: implications for sustainable economic growth

Background: Economic growth in sub-Saharan Africa has consistently remained the least when compared to any other region in the world. Countries in the region have received a lot of grants in form of aids to boost their capital accumulation; yet there is slow growth in most parts of the region. Many countries have implemented the World Bank and IMF suggested policies; and majority of the countries have adopted democratic political system. Yet growth in the region has remained very low. It then becomes pertinent to identify the causes of the low economic growth pattern in sub-Saharan Africa (SSA). The objective of this study, therefore, is to determine the impact of social infrastructure on economic growth of sub-Saharan Africa.Data and methods: The data for this study were 2001-2017 time-series data sourced from World Governance Indicators (WGI) and World Development Indicators (WDI). The standard panel data of fixed effect (FE) and random effect (RE) were employed in the analysis of the data, while Hausman test results guided the final choice of fixed effect estimation.Findings: The results show that corruption is statistically and significantly affecting economic growth of sub-Saharan African (SSA) countries. This means that control of corruption will help boost the economies in the region as low corruption is a prerequisite for economic recovery and sustainable development. Besides, trade openness, labour supply, and general government consumption significantly affect economic growth in SSA.Conclusion: SSA countries should control corruption as well as open their economies so as to reap the positive effects of economy of scale derived from diversification.

Corruption in space: A closer look at the world's subnations

Corruption levels differ not only between but also within countries. In this paper we analyze spatial interdependencies in corruption levels for a large sample of 1232 subnational regions from 81 countries. Based on a spatial autoregressive model, which controls for country-fixed effects and corrects for spatial autocorrelation in the error term, we find that a subnational region's corruption level is positively correlated with neighboring subnational regions' corruption levels. Extending the core model and allowing for heterogeneous spatial effects, we find that most spillovers among subnational regions occur within national borders. Moreover, in particular high income subnational regions and subnational regions with relative low corruption levels tend to spill in space. This is due to their high degree of connectivity in terms of economic, sociocultural and political exchange with other subnational regions. Our estimation results underline the importance to consider not only a subnational region's own characteristics, but also spatial interdependencies when implementing efficient anti-corruption policies at the local level.

Income inequality and level of corruption in post-communist European countries between 1995 and 2014

This paper analyses the relationships between income inequality and corruption in Europe and looks specifically at post-communist European countries. The scientific community agrees that there is important relationship between income inequality and corruption and many authors believe that low income inequality is connected to low corruption. According to empirical papers, this is true not only on the European scale, but also on a global scale. In this paper, I test this claim by conducting a multilevel analysis on 39 European countries in the period of 1995–2014. This model ascertains that there are immense differences between post-communist countries and the rest of European countries. The effects of income inequality on the level of corruption are discussed.

Privatization in Developing Countries: A Promising Development Strategy?

.

Frightened Mandarins: The Adverse Effects of Fighting Corruption on Local Bureaucracy

Canonical theories of bureaucracy demonstrate the need for enhanced monitoring in government hierarchies. I argue that intensive top-down monitoring may reduce the productivity of bureaucrats by frightening them away from the informal practices that they would otherwise rely on when completing daily tasks. Utilizing a unique dataset of sub-provincial inspections in China's recent anti-corruption campaign, I identify this ``chilling effect'' by exploiting variation in the timing of inspections from 2012 to 2017. I show that these anti-corruption activities lower the area of land development projects proposed by bureaucrats. Causal mediation analyses with investigation data and original measures of corruption potential reveal that these effects are unlikely driven by reduction of actual corruption. Extension analyses suggest similar consequences on revenue collection and environmental regulation. Although scholars of state-building equate low corruption with effective bureaucracy, these findings present a paradox where intensive state-led efforts to lower corruption may further undermine bureaucrats' productivity.

State Level Corruption: An Empirical Study of the Effects of State Level Corruption on Firm Performance in the United States

Over the past 30 years considerable work scrutiny has been undertaken in the area of corruption and its effect on many facets of society. In business, efforts to measure corruption have been frequently debated and models have been proposed to reflect different firm characteristics in the presence of corruption. Based on these measures, research usually considers single variable measures over time, generally cross-nationally. This study constructs a new model incorporating multiple different variables working in concert over the period from 2000-2015, to postulate a variety of different relationships and firm characteristics at the state level in the United States. In doing so, the model is constructed to limit biases that a single variable can have on the data. The model analyzes state level firm financial performance by utilizing ROA and Tobin’s Q as well as comparing high corruption state data to low corruption state data. The study finds that the presence of corruption increases the firm’s financial performance at the state level. These data are then used to conduct univariate testing with Ordinary Least Squares modelling to examine fixed firm effects as well as time lagged data. Significance is found to hold for these constraints and that firm financial performance is enhanced in high corruption states for most of the sample constructs. Supplementary models are subsequently constructed to test the robustness against significant economic events and legislative changes. The model is found to provide additional evidence when these tests are applied, thereby maintaining significance. The evidence from these tests are discussed and the conclusion reached is that corruption provides the opportunity for firms to enhance their financial performance, particularly for large firms, value firms, and firms with low leverage. It is also concluded that the benefits in performance from corruption are more beneficial in the short term.

How does anti-corruption affect firm labour inputs? Evidence from a quasi-natural experiment in China

ABSTRACTThis study investigates the impact of anti-corruption on firm labour inputs. Using the province-by-province rollout of the central inspection team campaign in China, we find that the labour intensity rises by 9% in the firms located in the provinces inspected by the central inspection teams. Moreover, firms with low corruption are more susceptible to the policy shock.

A FRAMEWORK FOR ANALYZING THE IMPACT OF FISCAL DECENTRALIZATION ON MACROECONOMIC PERFORMANCE, GOVERNANCE AND ECONOMIC GROWTH

This study analyzes the direct impact of fiscal decentralization on economic growth and broadens the scope of assessment by examining the indirect impact of fiscal decentralization on economic growth via its impact on macroeconomic performance and quality of governance institutions. The study uses a panel data set of 53 developed and developing countries over the period of 1996–2014. The empirical findings show that the indirect impact, rather than the direct impact of fiscal decentralization on growth, that is, the effect of decentralization on economic growth through its effect on macroeconomic performance and quality of governance institutions significantly matters for growth. Further, the results show that fiscal decentralization is growth enhancing when supported by stable macroeconomic performance in terms of stability in prices, budget deficit and exchange rate. The effect of fiscal decentralization on per capita gross domestic product (GDP) growth rate is positive when it is complemented by sound institutional structure in terms of rule of law, low corruption in government institutions, high-bureaucratic quality and democratic accountability. All these conclusions hold for developed as well as for developing countries.

The Dynamic Theory of Homicide: Adverse Social Conditions and Formal Social Control as Factors Explaining the Variations of the Homicide Rate in 145 Countries

Cross-national comparisons of crime across the world consistently show that homicide rates are higher in more impoverished countries. However, the role of formal social controls as mediators between social conditions and homicide has never been investigated across a large number of countries. To provide data on the efficiency of criminal justice systems across the world, we found 1,223 experts and had them fill out a questionnaire, providing data for 145 countries. Results from structural equations models (Amos) show that adverse social conditions (collective and individual poverty, inequality, and youthfulness of the population) downwardly affect the level of formal social control (application of the rule of law, low corruption rate, effectiveness of the criminal justice system, and satisfaction with the criminal justice agencies). Low levels of formal social control lead to higher levels of homicide. In other words, the effect of adverse social conditions on homicide is mediated by formal social control.

Political Corruption and Mergers and Acquisitions

This research examines the relation between political corruption and mergers and acquisitions (M&As). We find that local corruption increases firm acquisitiveness but decreases firm targetiveness. The levels of corruption in acquirer areas relate positively to the bid premiums and negatively to the likelihood of deal completion. Corruption motivates acquiring firms to use excess cash for payment, which mitigates the negative effect of corruption on acquirer shareholder value. The evidence indicates that acquisitions help acquiring firms convert cash into hard-to-extract assets and relocate assets from the high to low corruption areas, thereby shielding their liquid assets from expropriation by local officials.

Tax on Traded Goods, and Corrupt Non-traded Goods Sector: Implications for Intermediation Activities

Abstract This paper uses a Heckscher-Ohlin nugget framework with both traded and non-traded goods. Traded goods are subject to tax whereas non-traded good does not pay tax but is beset with corruption related intermediation. Our motive is to investigate the comparison of the effects of corruption and tax cut. We assume only the non-traded sector to be corruption affected. We argue that a fall in the degree of corruption surprisingly increases the number of intermediators while tax change has no effect on it. But the size of the intermediation activities expands in both the cases. Low corruption diminishes the exportable production and raises importable production while a tax cut does not have any such effect. The welfare implication is ambiguous in case of a decrease in cost of corruption. A tax cut, however, raises welfare unambiguously.

Preventing malfeasance in low corruption environments: twenty public administration responses

PurposeCorruption undermines good governance. Strategies for preventing malfeasance in low-corruption environments require a different approach to that applied in high-corruption environments. This paper aims to ask if criminological theories and practice contribute to the study and prevention of corruption in public organizations? Do crime prevention techniques help us in preventing corruption?Design/methodology/approachEmpirical data demonstrate that the overwhelming majority of public officials in rich countries demonstrate high levels of integrity; yet, significant sums are invested in anti-corruption agencies and prevention strategies. This paper reports on recent work with an anti-corruption agency, which forced us to re-think how to deliver an anti-corruption agenda in a low-corruption environment. The authors build on their research of public sector corruption in rich countries to develop a set of 20 situational corruption prevention measures for public administrators.FindingsThe result, with lessons from crime prevention, is a prevention tool to support continued good governance in low-corruption environments. Figure 1 is a template that readers can apply in their own environments. Figure 2 is the authors’ attempt to populate this template based on the research reported here.Originality/valueThe matrix of situational corruption prevention techniques provides two original approaches. First, it recasts the language of crime prevention into a non-confrontational approach to avoid alienating honest public officials. Second, the matrix incorporates common public sector functions to guide the development of context specific corruption prevention techniques.

Human capital and FDI: How does corruption affect the relationship?

Can corruption affect the relationship between human capital and FDI for a host country? This paper explores the interactive impact of corruption and human capital on FDI. In particular, we investigate whether countries with higher or lower corruption levels benefit differently in terms of FDI inflow following an equal improvement in the level of human capital. Employing an extensive panel data and robust identification strategies, our results suggest that if the corruption score of a highly corrupt country becomes comparable to that of a low corruption country, FDI inflow will rise by almost 40 percent for an equivalent rise in human capital stock. The results remain robust for various measures of human capital.

Making Development Work - The Quality of Government Approach

This report aims to summarize the results of research from the Quality of Government approach in terms of its importance for development and aid policy. Quality of Government (henceforth QoG) is understood as pertaining to the public institutions responsible for the implementation of public policies, i.e., the public administration and the judiciary. Qualitative as well as quantitative studies have shown that QoG factors, such as control of corruption, the rule of law, and administrative competence, have a strong positive impact on most standard measures of human well-being (e.g., infant mortality, life expectancy, and child poverty). QoG also has a positive impact on subjective factors, such as whether people state that they are satisfied with their lives, and if they perceive that they in general can trust other people in their society. The importance of QoG for human welfare becomes clear if compared with the effect that the quality of democracy has on the same measures. Such comparisons show that QoG has a significantly greater effect on human well-being than democracy has.One example of this is that authoritarian Communist China outperforms liberal-democratic India on virtually all standard measures of human well-being. This also applies when measuring the degree to which people in different countries perceive their government as legitimate. Survey-based studies show that while democratic rights are important for political legitimacy, QoG factors such as low corruption, the rule of law, and efficiency in the public administration have a greater significance on the extent to which people perceive their governments as legitimate. Added to this is another problematic result, namely that the introduction of democracy in a country shows not to be a safe cure against corruption and other forms of low QoG.

The Strenght of the Relationship Between Shadow Economy and Corruption: Evidence from a Worldwide Country-Sample

Using data from 193 countries and territories, the present study investigates the strength of the relationship between shadow economy and corruption via moderation analysis. The literature reports a rather ambiguous relationship between the two variables. By running four multiple regression models with the bootstrapping technique and judicial independence, reliability of police services, human development and business freedom as moderating variables, we show that shadow economy and corruption are complements. Our study suggests that, when nations have judiciaries free from political influence, enforce law efficiently while protecting social interests, register significant progress in human development (e.g., improved education, proper healthcare and living standards) or efficiently regulate the business environment by minimizing red tape and thus facilitating economic transactions, a small shadow economy is associated with a low corruption level.