Corruption, Corporate Social Responsibility and Financial Constraints: International Firm‐level Evidence

• Author: Kerstin Lopatta,Reemda Jaeschke,Magdalena Tchikov,Sumit Lodhia
• DOI: http://doi.org/10.1111/emre.12098
• Date: 01 March 2017
• Published date: 01 March 2017

Corruption, Corporate Social Responsibility

and Financial Constraints: International

Firm‐level Evidence

KERSTIN LOPATTA,

1

REEMDA JAESCHKE,

1

MAGDALENA TCHIKOV

1

and SUMIT LODHIA

2

1

Carl von Ossietzky University Oldenburg, Germany

2

University of South Australia, Australia

This study examines the relationship between firm‐level factors including corporate social responsibility (CSR)

performance and financial constraints, and the firm‐level risk of corruption. Facing a measurement challenge

referring to firm‐level risk of corruption, we define a corruption score based on corporate disclosures of corrupt

activities. We show that, first, CSR performance is negatively related to the risk of corporate corruption. Second, a

firm’s vulnerability to financial constraints is positively related to the risk of corporate corruption. Third, the effects

are particularly strongfor firms with low boardindependence. Finally, we contributeto prior literatureby developing

the first firm‐levelcorruption scorethat is not only robust to prevalent corruptionindices but is also applicableto any

dataset and can be used for future research on firm‐level corruption. Moreover, the study provides new empirical

evidence on firm‐level determinants thatrelate to corporate corruption risk.

Keywords: corruption; corporate social responsibility; financial constraints; transparency; content analysis

Introduction

Concerns about corporate corruption have been of

practical significance for as long as firms have existed.

However, only recently has corruption become a major

regulatory issue for governments around the world. This

is reflected in stricter legislations and more stringent

enforcement of anti‐corruption laws such as the UK

Bribery Act and the Foreign Corrupt Practices Act

(FCPA) which is enforcedby the Securities and Exchange

Commission(SEC). In parallel to increased attentionfrom

politics, corruption has become a focus of academic

research attempting to identify the reasons for corrupt

activities. Economic, political, and cultural factors have

been identified as influencing corrupt activities on a

country level (Mauro, 1997; Svensson, 2005). Yet firm‐

level studies on the impact of firm‐level factors on

corruption are largely missing from the picture (Cosenz

and Noto, 2014; de Jong and van Ees, 2014; Donadelli

et al., 2014) or based on empirical analyses of corporate

corruption in one single country (Carretta et al., 2012;

de Jong et al., 2015; Luo, 2011; Nguyen and van Dijk,

2012; Ravenda et al., 2015). One reason for the focus on

macro‐rather than firm‐level studies is the availability of

corruption measurements. While several corruption

indices exist, the majority are available on country‐rather

than firm‐level basis (e.g., Transparency International’s

CorruptionPerception Index (CPI), WorldBank’s Control

of Corruption Index (CCI), International Country Risk

Guide (ICRG)).Therefore, corruptionand its relationships

with firm‐level factors is a research field that to date

remains largely unexamined in the literature (Healy and

Serafeim, 2015).

Our study addresses these researchgaps and contributes

to existing literature by being the first to overcome the

absence of a suitable measure of corporate corruptionrisk

by defining a firm‐level corruption score. Based on

content analysis (e.g., Herawaty and Hoque, 2007;

Dragomir, 2009; Bruna et al., 2014), the reporting

transparency on issues related to corruption disclosed is

quantified in the annual reports of the 105 largest firms

worldwide. Checking the score with a range of different

models and comparing it to other measures of corruption,

the score is shownto be robust. The explanatory powerof

the self‐defined corruption score is further verified by

comparing it to the occurrence of alleged violations of

anti‐corruptionlaws. In contrast to other indices, the novel

scoring approach offers the unique advantage that it can

Correspondence: Magdalena Tchikov, Accounting and Corporate

Governance, Carl von Ossietzky University Oldenburg, Germany.

E‐mail: magdalena.tchikov@uni-oldenburg.de

European Management Review, Vol. 14, 47–65, (2017)

DOI: 10.1111/emre.12098

©2016 European Academy of Management

be re‐applied in future research to any set of firms when

investigating firm‐level corruption risk as it is based on a

firm’s corruption disclosure in annual reports.

Furthermore, the study provides new empirical

evidence on firm‐level factors related to corporate

corruption, a research field that is still unexplored (Luo,

2005; Svensson, 2005; Healy and Serafeim, 2015). The

study concentrates on a firm’s CSR performance as well

as its level of financial constraints and investigates

whether thesetwo factors are potentially relatedto the risk

of corruption. Data from the international risk rating

agency Global Engagement Services (GES) is used to

measure CSR performance. The results showthat a firm’s

CSR performance helps to mitigate its exposure risk to

corruption. Using the Kaplan and Zingales (1997) index

to assess a firm’s reliance on external financing, the result

shows thatfirms tend to be more at risk of corruptionwhen

they face higher financial constraints. The paper further

demonstratesthat the negative relationshipbetween firms’

CSR performance and firm‐level corruption risk is

particularly strong when board independence is low.

Based on the novel insights, important practical

implications for internationally operating firms,

governments, and society can be derived. The findings

provide fresh inputfor reporting and accounting strategies

by showing that factors such as sustainability and

financial performance can help firms’management to

combat business risk to corruption. This has important

practical implications. Firms can make use of the results

in that they can change their strategic management and

objectives considering their CSR investments and level

of financial constraints in order to minimizecorporate risk

of corruption. Shareholders and stakeholders can much

more effectively bring about a change in the firm’s

reporting and management strategy by improving these

two factors in order to lower corruption risk. The finding

that the level of financial constraints is kept low and

CSR performanceis kept high at the firm levelshould also

be relevant to legal institutions that should ensure these

within the scope of anti‐corruption laws.

Theoretical background

Definitions and concepts

From a criminological point of view, corruption is the

criminal misuse of social or economic power for personal

objectives (Rodriguez et al., 2006). In line with Luo

(2005: 121), we define corruption with a strong reference

to a firm‐level framework, namely as the ‘illegitimate

exchange of resources involvingthe use or abuse of public

or collective responsibility for private ends (i.e., gains,

benefits, profits or privileges)’. Private ends, in this

context, are often driven by firms’interests. In line with

de Jong et al. (2015), we, therefore, focus on the bribe

payment, as a corrupt transaction and consider firms as

units of our analysis. In contrast to de Jong et al.(2015),

however, we include not only the payment of monetary

means to public officials in our definition of corporate

corruption. In line with the FCPA, we expand our

definition of corruption to any payment or offer of

anything of value to any person with the objective to

secure any improper advantage in order to assist in

obtaining or retaining business. Following the findings

presented by Cosenzand Noto (2014), we include the risk

of engaging in corrupt activities due to a corrupt

operational environment in our definition of firm‐level

corruption.

Investors and financial markets place a high value on

socially responsible and transparent behavior. In other

words, they penalize firms that act irresponsibly, non‐

sustainably or even in a corrupt manner with unfavorable

market price trends (Elsayed and Hoque, 2010; Jo and

Harjoto, 2012; Lander and Auger, 2008; Siegel and

Vitaliano, 2007). Firms that operate knowingly in

unlawful and corrupt environments can cause critical

damage to their reputation and corporate governance

(Luo, 2011; Donadelli et al., 2014; Serafeim, 2014;

Braam et al., 2015; Keig et al., 2015).

Predominantlyon the macro level, scholars have shown

major interest in economic, political, orcultural factors of

corruption(Getz and Volkema, 2001; Mauro, 1997;Tanzi

and Davoodi, 1997; Svensson, 2005; Butler et al., 2009).

However, the identification of internal forces of

corruption that are potentially related to strategic firm

behavior has not been the main focus of prior research

(Healy and Serafeim, 2015). Yet, a firm‐level perspective

on the determinants of corruptionis particularly important

as it offers new ways to analyze as well as understand

corporate corrupt activities and the possible impacts of

firm‐level factors on corruption (Luo, 2005; Svensson,

2005; Cosenz and Noto, 2014). The limited research on

the firm‐level factors driving corporate corruption has

predominantly attempted to explain a firm’s governance

and its relationship with corruption and/or a firm’s

performance and its relationship with corruption (Beck

et al., 2005; Garmaise and Liu, 2005; Wu, 2005; Nguyen

and van Dijk, 2012; Cosenz and Noto, 2014; Donadelli

et al., 2014).

Corruption, governance and social responsibility

Investigating governance quality and its impact on firm‐

level corruption, Nguyen and van Dijk (2012) compare

private firms with state‐owned firms in Vietnam. They

quantify corruption according to a corruption severity

perception survey from 2005 and find that corruption

harms economic growth as it favors the state sector at

the expense of the private sector. They demonstrate that

48 K. Lopatta et al.

© 2016 European Academy of Management