Rent Seeking and Corporate Finance: Evidence from Corruption Cases

摘要

This study investigates the impact of political rent seeking on corporate financing behaviors in China – a country plagued by corruption problems and high corporate sector debt. Based on 23 high level government officer corruption cases, we identify a set of publicly traded companies whose senior managers engage in bribing the corrupt bureaucrats or are connected with the bureaucrats through prior job affiliations. We report significant decline in these companies’ leverage and debt maturity ratios relative to other unconnected firms subsequent to the arrest of the bureaucrats. These relations persist even if we only focus on the connected firms that are not involved in the corruption cases. This suggests that the weakened debt financing strength of the companies is not only attributable to the corruption cases per se, but also due to the lost connections with the bureaucrats. Our event study reveals that the relative decline in firm leverage are associated with negative stock market effects around the corruption events, reflecting the weakened financing capacity resulting from the lost political connections. This study’s overall evidence highlight the importance of rent seeking in firm behaviors, and support recent cross-country studies’ findings that country-level institutional factors matter to corporate financing choices.