Bribes and Firm Value
This Version: April 2014
I exploit the passage of the UK Bribery Act 2010 as an exogenous shock to UK firms’ cost of using
bribes to study whether the ability to use bribes creates firm value. First, I find that UK firms operating in
high corruption regions of the world display negative abnormal returns upon passage of the Act. A firm
operating exclusively in the most corrupt regions suffers a 6.2% drop in value compared to a firm
operating exclusively in the least corrupt regions. The effect is stronger for firms that are not already
subject to US anti-bribery regulation, are not part of corporate social responsibility indices, operate in
concentrated industries, and have better governance. Foreign firms subject to the Act because they have a
UK subsidiary also exhibit negative abnormal returns. Second, I identify real effects of the Act. Relative
to comparable continental European firms, UK firms expand their subsidiary network less into high
corruption regions and their sales in these regions grow six percentage points more slowly.
JEL Classification: G30, G34, G38, K22
Keywords: valuation, regulation, corruption, corporate governance
∗ Finance Department, INSEAD, Boulevard de Constance, 77300 Fontainebleau, France, Tel: +33160729124, Email: firstname.lastname@example.org. I
am especially grateful to my dissertation committee Morten Bennedsen, Denis Gromb, Maria Guadalupe, and Urs Peyer for numerous valuable
suggestions and insightful comments. I have benefitted from discussions by Dragana Cvijanovic, Ferdi Gul, Dev Mishra, Jeff Ng, Xiaofei Pan,
Fausto Panunzi, David Parsely, Jillian Popadak, Andreanne Tremblay, and from comments by Daniel Bens, Pramuan Bunkanwanicha, Adrian
Buss, Gavin Cassar, Woo-Jin Chang, Lin Chen, Bernard Dumas, Pushan Dutt, Alex Dyck, Lily Fang, Antonio Fatas, Sven Feldman, Vyacheslav
Fos, Federico Gavazzoni, Nicola Gennaioli, Xavier Giroud, Jarrad Harford, David Hémous, Gilles Hilary, Jeremy Horder, Raj Iyer, Jon Karpoff,
Ambrus Kecskes, Ralph Koijen, Massimo Massa, Maxim Mironov, Amine Ouazad, Daniel Paravisini, Paolo Pasquariello, Joel Peress, Tarun
Ramadorai, Raghu Rau, Ana Maria Santacreu, David Schumacher, Edmund Schuster, Carsten Sprenger, David Thesmar, Branko Urosevic, Theo
Vermaelen, Hannes Wagner, Charlie Wang, Franco Wong, Eric Zitzewitz, as well as participants at conferences (AFA 2014, AFBC 2013, AFBC
PhD Forum, Asia FA, CFA-JCF-Schulich Financial Market Misconduct, FMA Europe, London Transatlantic Doctoral, MIT Asia Conference in
Accounting, National Bank of Serbia Young Economists’ Conference, Young Scholar Symposium in Corporate Finance and Governance at
Renmin University) and seminars (Bocconi, ESCP, ESSEC, HBS (Accounting & Management), HEC, INSEAD (Finance, Economics), LSE
(Law), Nanyang Technological University, Norwegian School of Economics, Rutgers, UIUC, University of Hong Kong, University of Michigan
(Ross), University of Oxford, University of Toronto (Rotman), University of Washington, UT Dallas). I would like to thank GAP Books,
particularly Alan Philipp, for very generous help with subsidiary data for 2013 and FTSE for providing FTSE4Good UK index constituents for
2008. Remaining errors are my own.
The use of bribes is pervasive in business. According to a survey of more than 11,000 firms from 125
countries, one third of firms use bribes to secure public procurement contracts, paying 8% of the contract
value on average (D’Souza and Kaufmann 2011).1 Some developed nations have implemented unilateral
regulation punishing the use of bribes yet other nations, notably China and India, have not.2 Opponents of
such regulation argue that bribes are indispensable for doing business in certain areas or industries and that
unilateral regulation puts affected firms at a competitive disadvantage.
In this paper, I seek to assess whether the ability to use bribes creates firm value. This is challenging
because most bribes remain undetected. The empirical literature has studied detected cases, allowing cross-
sectional analysis but raising selection concerns.3 I address the challenge that most bribes remain
undetected by exploiting the unexpected passage of the UK Bribery Act 2010 on March 25, 2009. First, I
find that UK firms operating in high corruption regions of the world display negative abnormal returns
upon passage of the Act. A firm operating exclusively in the most corrupt regions suffers a 6.2% drop in
value compared to a firm operating exclusively in the least corrupt regions. The effect is stronger for firms
that are not already subject to US anti-bribery regulation, are not part of corporate social responsibility
indices, operate in concentrated industries, and have better governance. Foreign firms subject to the Act
because they have a UK subsidiary also exhibit negative abnormal returns. Second, I identify real effects of
the Act. Relative to comparable continental European firms, UK firms expand their subsidiary network less
into high corruption regions and their sales in these regions grow six percentage points more slowly.
Event study methodology requires that the passage of the draft of the UK Bribery Act came as a surprise
with substantial impact for firms. This is plausibly the case. First, the passage on March 25, 2009 was not
1 These summary statistics are based on the 2006 Executive Opinion Survey conducted by the World Economic Forum.
2 For instance, in 1977, the US passed the Foreign Corrupt Practices Act (FCPA) which imposes regulatory fines on firms found
having bribed foreign public officials.
3 See Cheung, Rau and Stouraitis (2012) and Karpoff, Lee and Martin (2013).
covered in the media during the weeks prior to this date. The media only covered the passage on the event
day and the days thereafter. Second, the monetary and personal fines associated with breaking the Act go
well beyond expectations, in particular well beyond previous UK legislation, requirements of the OECD
Anti-Bribery Convention, and comparable US legislation. The Act imposes potentially unlimited monetary
fines on corporations found to have used bribes4 and individuals responsible for bribery inside and outside
the UK. Also, the Act prohibits the use of facilitation payments5, which goes beyond comparable
regulation. Third, contrary to prior drafts of anti-bribery regulation, the Act also applies to foreign firms
with UK operations. This makes it harder for UK industry lobbyists to argue that solely UK firms are at a
competitive disadvantage vis-à-vis foreign competitors.6
I am testing whether firms operating in high corruption regions are more or less negatively affected by the
UK Bribery Act. My key explanatory variable Corruption Exposure measures firms’ exposure to high
corruption regions. To construct this measure, I combine hand-collected data on the country of location of
firms’ subsidiaries from Dun&Bradstreet’s Who Owns Whom 2008/2009 book series with Transparency
International’s Perceived Corruption Index (CPI). I define a firm’s Corruption Exposure as the weighted
average of its subsidiary country CPIs. The weight for each subsidiary country CPI is determined by the
number of subsidiaries in that country relative to the total number of subsidiaries. Firms with a large
fraction of subsidiaries headquartered in regions with high corruption levels score high on the Corruption
Exposure measure.7 The key dependent variable is firms’ abnormal stock return around the passage of the
Act. My findings are largely based on 645 listed UK firms for which abnormal returns and subsidiary data
are available; robustness tests consider 2 791 predominantly European firms.
4 The Act comprises active and passive bribery. Active bribery is defined by the Act as offering, giving, or promising to give a
financial or other advantage to a person in exchange for that person to improperly perform a relevant function. This includes
bribery of foreign public officials and other firms. Passive bribery is defined as receiving or agreeing to receive a financial or other
advantage in exchange for improperly performing a relevant function.
5 Facilitation payments (commonly known as grease payments) are payments that induce government officials to perform tasks
they are otherwise obligated to perform anyway.
6 Previous drafts of anti-bribery regulation in the UK were aimed solely at UK firms, making it easy for UK industry lobbyists to
argue that such regulation would put British firms at a competitive disadvantage.
7 Corruption Exposure weighs each subsidiary equally. Arguably, the probability of bribery activity being detected might increase
in subsidiary size. For robustness, I collect data on firm sales by geographic region and results still hold.
If firms use bribes as an investment to create firm value, the passage of costly anti-bribery regulation
should destroy firm value.8 Alternatively, managers might use bribes for their personal benefits9: in this
case, anti-bribery regulation punishing individual managers for the use of bribes would create firm value.
Confirming that bribes are indeed used to create firm value, my first main finding is that UK firms with