Collusive versus coercive corporate corruption: evidence from demand-side shocks and supply-side disclosures

We examine whether and how collusive and coercive forms of corporate corruption influence firm value. Our identification strategy exploits (i) the exogenous criminal prosecutions of regional government officials as part of China’s anti-corruption campaign as demand-side shocks and (ii) the unique reporting of entertainment and travel costs by Chinese firms as supply-side disclosure of corruption-related spending. Among firms for which corruption is likely to be perceived as collusive (coercive) by investors, we find that exposure to corruption-related political risk measured by abnormal entertainment and travel costs has a significantly negative (positive) relation with market reactions to the anti-corruption prosecutions. These findings are consistent with investors’ anticipation of a future decline in potential benefits (costs) arising from rent-sharing collusion (rent-extracting coercion). We also find that the collusion (coercion) effect is more pronounced for firms in regions with greater government economic intervention (in industries with stronger business competition). Furthermore, we provide evidence that the ex ante market reactions corroborate with the direction of changes in ex post operating performance of firms. Overall, our results suggest that investors can recognize differences in the economic consequences between collusive and coercive corruption and that the disclosure of corruption-related spending could help investors assess a firm’s exposure to corruption-related risk.