Does a country`s corruption level affect the outcome of a corruption scandal?: An event study of the effects of a country`s level of corruption on firms`s cumulative abnormal returns resulting from the news about corruption

摘要

By investigating the phenomenon of corruption, we found that corruption represents a hugecost on society. There exists extensive theory and literature on the costs of corruption, butcosts on firm-level has been limited. Because of this, we wanted to expand this literature bylooking at how a country`s level of corruption would affect a firms stock price reactionresulting from news about corruption.With a manual collection process we identified 71 individual corruption cases from sixcountries within the time period from April 2010 to April 2015. Using the standard eventstudy methodology, we found a significant negative stock market reaction to the news about afirm participating in corrupt actvities. For our sample as a whole, the cumulative averageabnormal return was -1.68% in the 7 days surrounding the event day. By doing a comparisonbetween firms from more corrupt countries and firms from less corrupt countries, we did notfind any evidence to say that the former should experience a more negative reaction on stockprice than the latterIn addition, our findings show that the size of the cumulative abnormal return resulting fromnews about corruption is positively influenced by the size of the firm. We also found evidenceof an interaction effect, where an increasing price-book ratio will positively moderate theeffect of the level of corruption. This indicates that a higher price-book ratio is beneficial in more corrupt countries.