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Journal of Corporate Finance Vol. 66 2021

Corporate profitability and the global persistence of corruption

Stephen P. Ferris1; Jan Hanousek2,3,4,5,6; Jiri Tresl

1 Ball State University · 2 Center for Economic Research and Graduate Education – Economics Institute · 3 Czech Academy of Sciences · 4 Charles University · 5 Centre for Economic Policy Research · 6 Mendel University in Brno

open access

Abstract

We examine the persistence of corporate corruption for a sample of privately-held firms from 12 Central and Eastern European countries from 2001 to 2015. Using publicly available information and stochastic frontier analysis, we create 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. In spite of corruption's negative effects on a country's economy, we conclude that it persists because of its ability to improve corporate profitability. We refer to this effect as the Corporate Advantage Hypothesis.

DOI
10.1016/j.jcorpfin.2020.101855
Volume
66
Pages
101855
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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