Working Paper: NBER ID: w26656
Authors: Haoyuan Ding; Hanming Fang; Shu Lin; Kang Shi
Abstract: We use China's recent anti-corruption campaign as a natural experiment to examine the (market expected) equilibrium consequences of (anti-)corruption. We argue that the announcement of inspections of provincial governments by the Central Commission for Discipline Inspection (CCDI) on May 17, 2013 represents a significant departure of past norms of anti-corruption campaigns, and thus serves a rare empirical opportunity to examine the equilibrium effects of anti-corruption campaigns for firms. We first present a conceptual framework to illustrate the channels through which anti-corruption actions can influence firms. Using an event study approach and May 17, 2013 as the event date, we find that, overall, the stock market responded positively to the announcement of strong anti-corruption actions. The announcement returns are significantly lower for luxury-goods producers, and SOES, large firms, or politically connected firms earn lower returns than private, small, or non-connected firms. We also find that existing local institutions play a crucial role in determining the announcement returns across firms. Moreover, a long-term difference-in-differences analysis shows that higher returns during the event window are associated with more subsequent entries of new firms and faster expansions of existing firms. Finally, we also provide direct evidence consistent with the endogenous grits effect.
Keywords: corruption; anticorruption campaign; China; firm performance; stock market response
JEL Codes: D73; D72; G34; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Local institutions (D02) | Moderation of effects on return differentials (C22) |
| Better legal protections and less developed factor markets (P23) | Smaller return differentials between different types of firms (L25) |
| Cumulative abnormal returns (CARs) (C22) | Subsequent firm entries and expansions (L26) |
| Announcement of CCDI inspections (G28) | Positive overall stock market response (G10) |
| Announcement of CCDI inspections (G28) | Shift in corruption norm (D73) |
| Shift in corruption norm (D73) | Enhanced firm performance (L25) |