No CrossRef data available.
Article contents
Swimming Upstream: Struggling Firms in Corrupt Cities
Published online by Cambridge University Press: 23 January 2025
Abstract
Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.
We find that a corrupt local environment amplifies the effects of financial distress. Following regional spikes in financial misconduct, credit becomes more difficult to obtain for local borrowers—even those not implicated themselves. This is particularly harmful for cash-constrained firms, which cut investment more sharply and lay off more workers during industry downturns. We also find that local clustering of financial misconduct is a risk factor for bankruptcy.
Information
- Type
- Research Article
- Information
- Journal of Financial and Quantitative Analysis , Volume 60 , Issue 7 , November 2025 , pp. 3311 - 3343
- Creative Commons
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.- Copyright
- © The Author(s), 2025. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington
Footnotes
We thank Jonathan Karpoff, Allison Koester, Scott Lee, and Gerald Martin for making their data on financial misconduct available. We also thank Jonathan Karpoff, Brian Melzer, Florian Schulz, Stefan Zeume, and seminar participants at University of Miami, University of Wisconsin (Milwaukee), 2015 ASU Sonoran Conference, 2015 UNC/Duke Corporate Finance Conference, 2015 Summer Real Estate Symposium, and 2016 American Finance Association meeting for useful comments and suggestions.
References
Adhikari, B.; Cicero, D.; and Sulaeman, J.. “Does Local Capital Supply Matter for Public Firms’ Capital Structures?” Journal of Financial and Quantitative Analysis, 56 (2021), 1809–1843.Google Scholar
Alti, A. “How Sensitive Is Investment to Cash Flow When Financing Is Frictionless?” Journal of Finance, 58 (2003), 707–722.Google Scholar
Amiram, D.; Bozanic, Z.; Cox, J. D.; Dupont, Q.; Karpoff, J. M.; and Sloan, R.. “Financial Reporting Fraud and Other Forms of Misconduct: A Multidisciplinary Review of the Literature.” Review of Accounting Studies, 23 (2018), 732–783. 10.1007/s11142-017-9435-xGoogle Scholar
Berger, A. N., and Bouwman, C. H. S. “Bank Liquidity Creation.” Review of Financial Studies, 22 (2009), 3779–3837.Google Scholar
Bharath, S.; Dahiya, S.; Saunders, A.; and Srinivasan, A.. “Lending Relationships and Loan Contract Term.” Review of Financial Studies, 24 (2011), 1141–1203.Google Scholar
Cabral, L. “Reputation on the Internet.” In The Oxford Handbook of the Digital Economy, Peitz, M. and Waldfogel, J., eds. Oxford, UK: Oxford University Press (2012), 343–354 .Google Scholar
Cai, W.; Cai, X.; Wang, Z.; and Yang, G.. “The Spillover Effect of Penalty Against Peer Firm Leaders: Evidence from Earnings Management.” Finance Research Letters, 54 (2023), 103701. 10.1016/j.frl.2023.103701Google Scholar
Campbell, J.; Hilscher, J.; and Szilagyi, J.. “In Search of Distress Risk.” Journal of Finance, 63 (2008), 2899–2939.Google Scholar
Cetorelli, N., and Strahan, P.. “Finance as a Barrier to Entry: Bank Competition and Industry Structure in Local U.S. Markets.” Journal of Finance, 61 (2006), 437–461.Google Scholar
Chava, S.; Huang, K.; and Johnson, S.. “The Dynamics of Borrower Reputation Following Financial Misreporting.” Management Science, 64 (2017), 4775–4797.Google Scholar
Chevalier, J. “Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing.” Journal of Finance, 50 (1995), 1095–1112.Google Scholar
Choi, H.; Karpoff, J.; Lou, X.; and Martin, G.. “Enforcement Waves and Spillovers.” Management Science (2023). 10.1287/mnsc.2023.4711Google Scholar
Dougal, C.; Parsons, C. A.; and Titman, S.. “Urban Vibrancy and Corporate Growth.” Journal of Finance, 70 (2015), 163–210.Google Scholar
Dougal, C.; Parsons, C. A.; and Titman, S.. “The Geography of Value Creation.” Review of Financial Studies, 35 (2022), 4201–4248.Google Scholar
Dyck, A.; Morse, A.; and Zingales, L.. “Who Blows the Whistle on Corporate Fraud?” Journal of Finance, 65 (2010), 2213–2253. 10.1111/j.1540-6261.2010.01614.xGoogle Scholar
Eaton, J., and Gersovitz, M.. “Debt with Potential Repudiation: Theoretical and Empirical Analysis.” Review of Economic Studies, 48 (1981), 289–309.Google Scholar
Erickson, T.; Jiang, C.H.; and Whited, T.. “Minimum Distance Estimation of the Errors-in-Variables Model Using Linear Cumulant Equations.” Journal of Econometrics, 183 (2014), 211–221.Google Scholar
Erickson, T., and Whited, T.. “Measurement Error and the Relationship Between Investment and q.” Journal of Political Economy, 108 (2000), 1027–1057.Google Scholar
Erickson, T., and Whited, T.. “Two-Step GMM Estimation of the Errors-in-Variables Model Using High-Order Moments.” Econometric Theory, 18 (2002), 776–799.Google Scholar
Erickson, T., and Whited, T.. “Treating Measurement Error in Tobin’s q.” Review of Financial Studies, 25 (2012), 1286–1329.Google Scholar
Fazzari, S.; Hubbard, R.; and Petersen, B.. “Financing Constraints and Corporate Investment.” Brookings Papers on Economic Activity, (1988), 141–206.Google Scholar
Francis, J.; LaFond, R.; Olsson, P.; and Schipper, K.. “Costs of Equity and Earnings Attributes.” Accounting Review, 79 (2004), 967–1010.Google Scholar
Gale, D., and Hellwig, M.. “Incentive-Compatible Debt Contracts: The One-Period Problem.” Review of Economic Studies, 52 (1985), 647–663.Google Scholar
Gande, A., and Lewis, C.. “Shareholder-Initiated Class Action Lawsuits: Shareholder Wealth Effects and Industry Spillovers.” Journal of Financial and Quantitative Analysis, 44 (2009), 823–850.Google Scholar
Giannetti, M., and Wang, T.. “Corporate Scandals and Household Stock Market Participation.” Journal of Finance, 71 (2016), 2591–2636.Google Scholar
Glaeser, E., and Saks, R.. “Corruption in America.” Journal of Public Economics, 90 (2006), 1053–1072.Google Scholar
Goldman, E.; Peyer, U.; and Stefanescu, I.. “Financial Misrepresentation and its Impact on Rivals.” Financial Management, 41 (2012), 915–945.Google Scholar
Graham, J. R.; Li, S.; and Qiu, J.. “Corporate Misreporting and Bank Loan Contracting.” Journal of Financial Economics, 89 (2008), 44–61.Google Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “The Role of Social Capital on Financial Development.” American Economic Review, 94 (2004), 526–556.Google Scholar
Hadlock, C., and Pierce, J.. “New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index.” Review of Financial Studies, 23 (2010), 1909–1940.Google Scholar
Hoberg, G., and Maksimovic, M.. “Redefining Financial Constraints: A Text-Based Analysis.” Review of Financial Studies, 28 (2015), 1312–1352.Google Scholar
Hribar, P., and Jenkins, N.. “The Effect of Accounting Restatements on Earnings Revisions and the Estimated Cost of Capital.” Review of Accounting Studies, 9 (2004), 337–356.Google Scholar
Karpoff, J. M. “Financial Fraud and Reputational Capital.” In Corruption and Fraud in Financial Markets: Malpractice, Misconduct and Manipulation, Alexander, C. and Cumming, D., eds. New York, NY: John Wiley & Sons (2020).Google Scholar
Karpoff, J. M.; Koester, A.; Lee, D. S.; and Martin, G.. “Proxies and Databases in Financial Misconduct Research.” Accounting Review, 92 (2017), 129–163.Google Scholar
Karpoff, J. M.; Lee, D. S.; and Martin, G.. “The Cost to Firms of Cooking the Books.” Journal of Financial and Quantitative Analysis, 43 (2008a), 581–611.Google Scholar
Karpoff, J. M.; Lee, D. S.; and Martin, G.. “The Consequences to Managers for Financial Misrepresentation.” Journal of Financial Economics, 88 (2008b), 193–215. 10.1016/j.jfineco.2007.06.003Google Scholar
Kaufmann, D.; Kraay, A.; and Zoido-Lobaton, P.. “Governance Matters.” World Bank Policy Research Working Paper No. 2196. Washington, DC: World Bank (1999).Google Scholar
Kedia, S., and Rajgopal, S.. “Do the SEC’s Enforcement Preferences Affect Corporate Misconduct?” Journal of Accounting and Economics, 51 (2011), 259–278.Google Scholar
Knack, S., and Keefer, P.. “Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures.” Economics and Politics, 7 (1995), 207–227.Google Scholar
Kroszner, R., and Strahan, P.. “What Drives Deregulation? Economics and Politics of the Relaxation of Bank Branching Restrictions.” Quarterly Journal of Economics, 114 (1999), 1437–1467.Google Scholar
La Porta, R.; Lopez-De-Silanes, F.; Shleifer, A.; and Vishny, R.. “Legal Determinants of External Finance.” Journal of Finance, 52 (1997), 1131–1150.Google Scholar
Lel, U.; Martin, G.; and Qin, Z.. “Delegated Monitoring, Institutional Ownership, and Corporate Misconduct Spillovers.” Journal of Financial and Quantitative Analysis, 58 (2023), 1547–1581.Google Scholar
Maksimovic, V., and Titman, S.. “Financial Policy and Reputation for Product Quality.” Review of Financial Studies, 4 (1991), 175–200.Google Scholar
Mauro, P. “Corruption and Growth.” Quarterly Journal of Economics, 110 (1995), 681–712.Google Scholar
Miao, S.; Ai, M.; Bai, J.; Chen, T.; and Sun, A. X.. “The Spillover of Shareholder Litigation Risk and Corporate Voluntary Disclosure.” Journal of Accounting, Auditing & Finance, 40 (2025), 799–831. 10.1177/0148558X231194894Google Scholar
Opler, T., and Titman, S.. “Financial Distress and Corporate Performance.” Journal of Finance, 49 (1994), 1015–1040.Google Scholar
Palmrose, Z.-V.; Richardson, V.; and Scholz, S.. “Determinants of Market Reactions to Restatement Announcements.” Journal of Accounting and Economics, 37 (2004), 59–89.Google Scholar
Parsons, C.; Sulaeman, J.; and Titman, S.. “The Geography of Financial Misconduct.” Journal of Finance, 73 (2018), 2087–2137.Google Scholar
Petersen, M., and Rajan, R.. “The Effect of Credit Market Competition on Lending Relationships.” Quarterly Journal of Economics, 110 (1995), 407–443.Google Scholar
Phillips, R. “Stakeholder Theory and A Principle of Fairness.” Business Ethics Quarterly, 7 (1997), 51–66.Google Scholar
Pirinsky, C., and Wang, Q.. “Does Corporate Headquarters Location Matter for Stock Returns?” Journal of Finance, 61 (2006), 1991–2015.Google Scholar
Putnam, R. Making Democracy Work: Civic Traditions in Modern Italy. Princeton, NJ: Princeton University Press (1993).Google Scholar
Rousseau, D.; Sitkin, S.; Burt, R.; and Camerer, C.. “Not So Different After All: A Cross-Discipline View of Trust.” Academy of Management Review, 23 (1998), 393–404.Google Scholar
Schneider, F., and Frey, B.. “Economic and Political Determinants of Foreign Direct Investment.” World Development, 13 (1985), 161–175.Google Scholar
Sharpe, S. “Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships.” Journal of Finance, 45 (1990), 1069–1087.Google Scholar
Titman, S. “The Effect of Capital Structure on a Firm’s Liquidation Decision.” Journal of Financial Economics, 13 (1984), 137–151.Google Scholar
Wang, T.; Winton, A.; and Yu, X.. “Corporate Fraud and Business Conditions: Evidence from IPOs.” Journal of Finance, 65 (2010), 2255–2292.Google Scholar
Wang, Z., and Zhang, C.. “Do Shareholder Litigations Have Spillover Effects on Peer Companies from the Perspective of Financing Constraints?” Finance Research Letters, 58 (B) (2023), 104401. 10.1016/j.frl.2023.104401Google Scholar
Parsons et al. Supplementary Material
Parsons et al. supplementary material
File
181.3 KB
You have
Access
Open access