Corruption and International Valuation: Does Virtue Pay?

Using firm-level data from 44 countries, the authors investigate the relation between corruption and international corporate values. The analysis shows that firms from more corrupt countries trade at significantly lower market multiples. The effect is both economically and statistically significant. Furthermore, using a two-stage estimation procedure, the authors show that corruption impacts firm value primarily through lower expected future cash flows, most directly captured by firms’ profitability forecasts. Collectively, the evidence shows that corruption has significant economic consequences for shareholder value.