Bo Li, Zhengwei Wang, and Hao Zhou, 2016, Contagion or Competitive Effects of Anti-Corruption? Evidence from China. Working paper.

Abstract:

This paper investigates the effect of anti-corruption announcement on the financial policies of competitors in the same industry of corruption related firms. The peer firms did not experience decreases in abnormal returns in the 12 days surrounding the investigation announcement. We find that corruption case announcements are associated with increases in debt issuance and the amounts of bank loan financing. The effect is more pronounced for non-SOEs and firms operate in competitive industries, which suggests that in such industries competitors benefit from the disadvantage of corruption related firms. Further evidence suggests that peer firms capture larger market share and increase investment efficiency after the anticorruption events. Our results suggest that the industry-specific competition dominates the industry-specific contagion surrounding anti-corruption announcements. Consequently, bank lenders re-allocate economic resources towards more efficient industry peers, which levels of playing fields for firms in China.