Political corruption and cost stickiness: Evidence from China

Abstract

This study investigated the effect of local corruption on the cost behaviour of publicly traded firms in China over the period from 2007 to 2017. Our findings show that firms situated in regions with higher corruption levels tend to exhibit greater cost stickiness, primarily driven by managerial empire-building incentives and rent-seeking behaviours. This effect is particularly pronounced in firms subject to greater government intervention, weaker internal controls, fewer political connections, and less market competition. Furthermore, this corruption-induced cost behaviour is found to negatively impact firm value. The results underscore the critical role of institutional environments, particularly corruption, in shaping corporate cost management strategies. This study provides valuable insights into how corruption influences economic outcomes for firms and offers guidance for managers, regulators, and investors to address these challenges and optimise cost management practices.