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Rent Seeking and Corporate Finance - CUHK Business School ...

Rent Seeking and Corporate Finance - CUHK Business School ...

Rent Seeking and Corporate Finance - CUHK Business School

Rent Seeking and Corporate Finance:Evidence from Corruption Cases*Joseph P.H. Fan a , Oliver Meng Rui b , and Mengxin Zhao ca Faculty of Business Administration, The Chinese University of Hong Kong;pjfan@cuhk.edu.hk; 852-2609-7839.b Faculty of Business Administration, The Chinese University of Hong Kong;oliver@cuhk.edu.hk; 852-2609-7594.c Department of Finance, Bentley College; mzhao@bentley.edu; 1-781-891-2570.October, 2006AbstractThis study investigates the impact of political rent seeking on corporate financing behaviors inChina – a country plagued by corruption problems and high corporate sector debt. Based on 23high level government officer corruption cases, we identify a set of publicly traded companieswhose senior managers engage in bribing the corrupt bureaucrats or are connected with thebureaucrats through prior job affiliations. We report significant decline in these companies’leverage and debt maturity ratios relative to other unconnected firms subsequent to the arrest ofthe bureaucrats. These relations persist even if we only focus on the connected firms that are notdirectly involved in the corruption cases. This suggests that the weakened debt financing strengthof these companies is not only attributable to the corruption cases per se, but also due to the lostconnections with the bureaucrats. The event study reveals that the relative decline in firmleverage is associated with negative stock market reactions around the corruption events. Ananalysis of long-term performance corroborates this relation. We also examine a possibility thatthe rent seekers are efficient firms and hence corruption does not result in capital mis-allocation,but we fail to find such evidence. This study’s overall evidence highlights the importance ofrent seeking in firm behaviors, and supports recent cross-country studies that find country-levelinstitutional factors matter to corporate financing choices.JEL Classifications: D23; G32; G38; K42; P26 ; P31Key Words: Corruption; Rent Seeking; Corporate Finance; Capital Structure; China*This paper has benefited from comments and suggestions from Utpal Bhattacharya, Julan Du, Ray Fisman, Jin Li,Wei Jiang, Justin Yifu Lin, Christian Leuz, Randall Morck, Harold Mulherin, Enrico Perotti, Jun Qian, Qian Sun,Vicki Tang, Sheridan Titman, Garry Twite, Bernard Yeung, T.J. Wong, and seminar participants at University ofAlberta, Bentley College, Chinese University of Hong Kong, Development Bank of Japan, Harvard BusinessSchool, Melbourne Business School, Peking University, University of Tokyo, Wasada University, and participantsat the 2006 Conference on Banking, Corporate Finance and Intermediation in Shanghai, Conference on Institutions,Politics, and Corporate Governance in Tokyo, the 2006 Finance Summit Conference and the 2006 ChinaInternational Conference in Finance in Xi’an. We thank Xiaoyang Hou for sharing data and research assistance.1

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