The impact of corruption on financial markets

The purpose of this paper is to focus specifically on the role of corruption in affecting financial markets. Recently, there are several studies that examine how one country’s level of corruption might affect asset prices in other countries. The aim of this article is to summarize how corruption may affect the bond and stock markets.

The paper is organized as follows. Section 1 defines corruption and briefly examines the causes of corruption. Section 2 examines various measures of corruption and provides a ranking of countries. Section 3 explains how corruption may affect business and provide anecdotal evidence. Section 4 provides a summary of some empirical evidence of corruption on firm performances. Section 5 concludes.

Across international financial markets, corruption is found to be associated with higher firm’s borrowing cost, lower stock valuation, and worse corporate governance.

This paper provides a brief summary on research related to corruption and its impact on financial markets. Anecdotal evidence has shown the disruptive effect of corruption, and theoretical literature largely confirms this effect. Empirical studies show that the cost of corruption is highly significant in many different areas of the economy. In particular, across international financial markets, corruption is found to be associated with higher borrowing cost, lower stock valuation, and worse corporate governance.