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

4.1. The event studyTo examine whether any of the lost financing advantages is reflected by lower stockvaluation, we perform an event study in which we estimate the cumulative abnormal stockreturns of the firms around the initial public release of the corruption news. The event day of acorruption scandal is identified as the first day that the public is informed about a bureaucrat’swrongdoings. Such notices can be Shuang Gui (a government detention measure that orders theperson to confess his/her crimes at a specific location), arrestment, or removal from the currentposition. The event days of the 23 corruption cases have been reported in Table 1.The standard event study methodology is used to investigate how the corruption newsaffects the stock prices of the firms.The abnormal return for security i on event date t isARi, t= Ri,t− E( Ri,t| It), where AR i,t , R i,t , and E R i| I ) are the abnormal, actual, and expected returns for time period t,(, t trespectively. It is the information on which the expected return depends. There are twocommon ways for modeling the expected return: the mean adjusted returns model where I t is aconstant, and the market model where I t is the market return. We employ both methods in ourstudy. We use both equal- and value-weighted market returns when the market model isemployed. We accumulate AR i,t to obtain cumulative abnormal returns (CARs), using eight eventwindows of different length, ranging from 60 days before to 60 days after the event day.Because the results are qualitatively similar, we report the results based on the market model andvalue-weighted market returns.To examine whether there is any association between changes in leverage and the stockmarket reactions around the corruption events, in Table 6, we stratify the sample into threeterciles (bottom, middle, and top) based on the degree of change in the three-year mean debt to22