Corruption and Stock Price Volatility : Firm-Level Evidence

This paper investigates the effects of corruption on equity price volatility using a sample of over 10,000 firm-level observations from 35 countries for 2003--2014. Utilizing approximately 16,000 responses from the World Bank Enterprise Survey, we construct experience-based annual corruption measures termed \emph{local corruption} to match the firm's size, industry, location, and country. Our identification strategy allows for the causal interpretation by eliminating the concerns that our estimates could be biased due to the omission of not only unobserved fixed factors but also time-varying size-industry-location-country-specific factors. We document a robust positive association between corruption and firm-specific equity price volatility. Additionally, we find that the Control of Corruption Index (CCI)--the World Bank's perception-based corruption index measured at the country level--is positively associated with stock price volatility. Finally, we find that while local corruption is more harmful to smaller firms, country-level corruption is more harmful to larger firms