09 Mar 2012Working Paper Summaries

Causes and Consequences of Firm Disclosures of Anticorruption Efforts

by Paul Healy and George Serafeim

Academic research on corruption has typically focused on its macro causes and consequences. While the country level is certainly important to understand, it is at the firm level where many questions remain unanswered. This study examines 480 of the world's largest companies, using ratings by Transparency International of firms' public disclosures of strategy, policies, and management systems for combatting corruption. Professors Paul Healy and George Serafeim find that firm disclosures are related to enforcement and monitoring costs, such as home country enforcement, US listing, big four auditors, and prior enforcement actions. Disclosures also reflect industry and country corruption risks. Meanwhile the financial implications of fighting disclosure are more nuanced. Key concepts include:

While firm-level research on corruption is still at the formative stage, findings suggest that disclosure is more than cheap talk.
Firms with high disclosure on their anticorruption efforts are committed to fighting corruption. The policies and enforcement actions reflected in their disclosures help to protect their public reputation and profitability, but at the cost of slower sales growth in high corruption risk markets.
Firms with abnormally low disclosure have roughly 15 percent higher sales growth in corrupt country markets than their high disclosure peers. But this higher growth is accompanied by lower profit margins and return on equity.
Firms with abnormally high anticorruption ratings have a lower frequency of subsequent allegations of corruption in the media, suggesting that disclosures reflect their commitment to fighting corruption.
Future research could examine (among other issues) what factors, other than monitoring/enforcement costs and risk exposures, explain the differences in firms' level of disclosure and commitment to fight corruption.

Author Abstract

Using Transparency International's ratings of firm disclosures on anticorruption efforts, we find that disclosures are related to firms' country and industry exposures to corruption, and to enforcement and monitoring variables. We then examine whether firms' residual anticorruption disclosures are related to subsequent allegations of corruption and subsequent performance. Firms with abnormally low anticorruption disclosures have higher subsequent media allegations of corruption than firms with abnormally high disclosure. They also report higher future sales growth, and a negative relation between profitability and sales growth in high corruption countries. None of those differences is observed across firms with high and low abnormal anticorruption disclosures in low corruption countries. We interpret these findings as indicating that firms with abnormally high disclosures enforce policies designed to combat corruption. These policies are accompanied by lower subsequent allegations of corruption, and lower but more profitable sales growth in high corruption countries.