In the paper, Which firms benefit from bribes, and by how much? Evidence from corruption cases worldwide, which was recently made publicly available on SSRN, we analyze a hand-collected sample of 166 prominent bribery cases, involving 107 publicly listed firms from 20 stock markets that have been reported to have bribed government officials in 52 countries worldwide during 1971-2007. Prior papers have focused on the date of the revelation of the bribe on the firm’s stock price.
Our research questions are different from this literature. We try to answer three questions. First, who bribes? Second, how much do they pay? Third, what benefits do they get? In contrast to prior literature, to answer our research questions, we focus on the initial date of award of the contract for which the bribe was paid. At that time, the market was unaware that the firm obtained a particular contract by paying a bribe. So the change in market capitalization of the firm on the bribe paying date (which is only available ex-post) provides the magnitude of benefits firms get from the bribe. By subtracting the value of the bribe from the benefits, we get a measure of the NPV for the bribe.
We find that firms that win contracts by paying bribes under-perform their peers for up to three years before and after winning the contract for which the bribe was paid. The major characteristic that distinguishes these firms from their peers is sales growth. Firms that bribe are fixated on sales growth, not on maximizing shareholder value. Firm performance, the rank of the politicians bribed, as well as bribe-paying and bribe-taking country characteristics affect the magnitude of the bribes and the benefits that firms derive from them. Shareholders in these firms benefit but the higher the rank of politicians that they bribe, the lower the benefit that they get. Ultimately, if you bribe a head of state for example, the shareholders get no benefit from winning the contract – the size of the bribe more than offsets the value of the contract to the firm.
Our results have numerous policy implications. We show that since the worst firms win contracts, society is worse off from these payments, not merely because poorly performing firms may also deliver poor results, but because these firms are less efficient in converting inputs into results. Measures that promote shareholder monitoring of managers (e.g., director liability, shareholder lawsuits) may help reduce bribery. Institutions that promote transparency (e.g. democracy, freedom of the press, education, disclosure of politician sources of income), institutions that promote enforcement (e.g., police reliability), and measures that eliminate regulatory rigidities may also help reduce bribery.
The full paper is available for download here.