The Agency Problem, Financial Performance and Corruption: Country, Industry and Firm Level Perspectives

This paper studies the relationship between the agency problem, financial performance and corruption from country, industry and firm level perspectives. First, we observe that companies operating in countries with a high level of corruption tend to display relatively low returns. Second, in an industry‐by‐industry context, we find that the negative relationship between corruption and average stock returns is stronger in specific industries, which we define as ‘corruption sensitive’. Third, at the firm level, we show that agency problems are exacerbated in corruption‐sensitive industries. Our study builds on the existing literature in three main areas. First, it proposes a novel macro‐based approach aimed at identifying corruption‐sensitive industries. Second, it provides evidence supporting that corruption exacerbates agency conflicts. Third, it provides evidence on the generalizability of standard corporate governance predictions to companies operating in corruption‐sensitive industries.