Harmful Supreme Court decisions, cynical public discourse and the Trump administration’s hostility to checks and balances have combined to create an extraordinary moment in American politics. The growing brazenness of federal officials is raising alarms that the country is drifting away from democratic norms and toward a form of government that undermines the nation’s sovereignty. It is essential to address these problems immediately and push for structural reforms that strengthen federal institutions and return democratic power to the people.
Prior work has focused on the impact of revelations of actual corruption scandals engaged by corporates but little effort has gone into examining the stock market dimensions. This paper aims to fill this gap.
We use a new data set of business risks for 122 countries and estimate a dynamic panel fixed effect model of the impact of corruption on stock returns (SR) using monthly data from 1995 to 2014. Corruption, DA, LO and BQ are the free variables and the interaction between them and SR is explored.
We find that a one percentage point increase in corruption reduces SR by 0.4%. However, this negative marginal impact diminishes as democracy expands. Moreover, the interaction between corruption and institutional factors generates mixed evidence about whether it is greasing or putting sand in the wheel of stock markets: bureaucratic quality moderates corruption’s negative impacts by increasing firm efficiency and reducing red tape; on the other hand, corruption distorts law and order, and hence lowers stock returns.