Do corrupt practices lead to increased cash holdings in firms? International evidence

Using cross-country firm-level data from 36 countries, we find that corrupt practices are associated with higher cash holdings. Further analysis suggests that corrupt firms are more constrained financially, motivating them to hold more cash. Our cross-country findings indicate that the positive association between corrupt business practices and corporate cash holdings is more pronounced in contexts characterized by higher institutional quality and greater market orientation. Moreover, our evidence also suggests that corrupt behaviors and high cash holdings are more prominent among young firms and those with high capital expenditure and market to book ratio. Our results survive endogeneity tests and are robust to the use of alternate models and measures. • We find that firms involved in corrupt practices tend to hold significantly more cash. • Corrupt firms face greater financial constraints, leading them to hoard cash as a precautionary measure. • The effect is stronger in younger firms, high-growth firms (high market-to-book ratios) and firms with high capital expenditures. • The positive relationship is more pronounced in countries with better institutions. • Corrupt firms in market-based economies hold more cash than those in bank-based systems.