Carlos D. Ramireza, Yi Huangb
Author information
a Department of Economics, College of Humanities and Social Sciences, George Mason University, 4400 University Drive, Fairfax, VA 22030-4444, USA
b Cheung Kong Graduate School of Business, 10th Floor-E1, No.1 Changan Avenue, Beijing 100738, China
E-mail: cramire2@gmu.edu (Carlos D. Ramirez, corresponding author), yi.huang@iheid.ch (Yi Huang)
Abstract
We examine whether corporate corruption scrutiny affects corporate investment in China. A corruption news index (CNI) containing firm-specific measures of corruption scrutiny was developed by tracking all articles in the press about corruption for all firms trading on the Shanghai and Shenzhen stock exchanges between 2000 and 2016. We found that a standard deviation increase in CNI is associated with a modest and short-lived decline in investment, ranging from 2 to 10 percent, with a stronger effect among SOEs. We explore two channels that can explain the CNI-investment effect: (i) a shift in the cost of external finance and (ii) a rise in political uncertainty connected with corporate corruption scrutiny. Our results indicate that CNI lowers the cost of external finance, pointing to a beneficial aspect of corruption cleanup. However, the effect of CNI on investment is amplified in the presence of provincial political turnover, providing support for the political uncertainty channel. The results also indicate that the negative effect of CNI on investment has significantly declined since 2013, supporting the proposition that the long-term benefits of corruption cleanup outweigh the short-term costs associated with policy uncertainty.
Keywords
corruption scrutiny, corporate investment, political uncertainty, external finance costs
Cite this article
Carlos D. Ramirez, Yi Huang. Corruption News and Corporate Investment: Evidence from China. Front. Econ. China, 2021, 16(3): 405−446 https://doi.org/10.54605/fec20210301
