Title

The effects of corruption on capital structure: when does it matter?

Department/School

Finance

Date of this version

2014

Document Type

Article

Keywords

Corruption, Cost of Debt, Cost of Equity, Capital Structure

Abstract

We study the effects of corruption on the capital structures of firms in 72 countries. Using the Corruption Perception Index, we show that corruption increases the costs of debt and equity. Interestingly, as the level of corruption decreases, these costs become more sensitive to changes in corruption. Similarly, the capital structure adjustment speeds exhibit a non-linear dynamic. These results indicate that for the most corrupt countries, it is necessary to engage in corruption reduction efforts to get past a minimum threshold before they can affect the behaviors of firms. Additionally, the least corrupt countries need to remain vigilant against increases in corruption.

Published in

Journal of Developing Areas

Citation/Other Information

48(1), 315-335. DOI: 10.1353/jda.2014.0012