Does a country`s corruption level affect the outcome of a corruption scandal?: An event study of the effects of a country`s level of corruption on firms`s cumulative abnormal returns resulting from the news about corruption
MetadataShow full item record
- Master Thesis 
By investigating the phenomenon of corruption, we found that corruption represents a huge cost on society. There exists extensive theory and literature on the costs of corruption, but costs on firm-level has been limited. Because of this, we wanted to expand this literature by looking at how a country`s level of corruption would affect a firms stock price reaction resulting from news about corruption. With a manual collection process we identified 71 individual corruption cases from six countries within the time period from April 2010 to April 2015. Using the standard event study methodology, we found a significant negative stock market reaction to the news about a firm participating in corrupt actvities. For our sample as a whole, the cumulative average abnormal return was -1.68% in the 7 days surrounding the event day. By doing a comparison between firms from more corrupt countries and firms from less corrupt countries, we did not find any evidence to say that the former should experience a more negative reaction on stock price than the latter In addition, our findings show that the size of the cumulative abnormal return resulting from news about corruption is positively influenced by the size of the firm. We also found evidence of an interaction effect, where an increasing price-book ratio will positively moderate the effect of the level of corruption. This indicates that a higher price-book ratio is beneficial in more corrupt countries.