Country corruption and corporate cash holdings: the mediating effect of firm’s anti-bribery policy

Abstract

The literature about the influence of country corruption on corporate cash holdings is not conclusive as there are studies supporting both a positive and negative relationship. To better explain this relationship, our study introduces a corporate-level mediating variable, i.e. the company's willingness to fight bribery as part of its CSR policy. Using a sample of 1,075 listed firms from 21 European Union countries for the period 2008–2019 (7,771 firm-year observations), we find a partial mediating effect of the corporate anti-bribery policy on the relationship between country corruption and corporate cash holdings. On the one hand, according to the shielding argument, country corruption negatively influences corporate cash holdings. And, on the other hand, there is a mediating effect such that firms in corrupt countries adopt less tough anti-bribery policies and, instead, they reduce their cash holdings both to protect themselves from expropriation and to signal their limit on bribe payments.

KEYWORDS:

• Corruption
• cash holdings
• CSR
• bribery
• mediating effect

Acknowledgements

We gratefully acknowledge participants at the EUMODFRAUD Final Conference (Porto), the two anonymous referees and the Editor. We acknowledge financial support from the EU PROJECT H2020 and Hercules III Program (HERCULE-2019-LT-AG). I. Garcia-Rodriguez also acknowledge financial support from the Comunidad de Madrid Research Project for Young Researchers (SI3-PJI- 2021-00276).

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Article 83 of the TFEU states that ‘The European Parliament and the Council may, by means of directives adopted in accordance with the ordinary legislative procedure, establish minimum rules concerning the definition of criminal offences and sanctions in the areas of particularly serious crime with a cross-border dimension’. Among these areas, the article includes corruption and money laundering. And the article 325 of the TFEU states that ‘The Union and the Member States shall counter fraud and any other illegal activities affecting the financial interests of the Union through measures to be taken in accordance with this Article’.

2 Details of this legislation and actions can be consulted on the official website of the European Union: https://eur-lex.europa.eu, in the section on Summaries of EU legislation dedicated to Fraud and Corruption.

Additional information

Funding

This work was supported by European Commission: [EU proposal 878513 – Hercule III 2019 Legal Training and Studies,HERCULE-2019-LT-AG]; Comunidad de Madrid - UAM: [Grant Number SI3-PJI-2021-00276].

Notes on contributors

Teresa Elvira-Lorilla

Teresa Elvira-Lorilla is a researcher in business economics in the Department of Business at the University of Burgos (Spain). Her research focuses on transparency, social media, and funding of nonprofit organizations.

Inigo Garcia-Rodriguez

Inigo Garcia-Rodriguez, PhD, is an Associate Professor of Corporate Finance in the Department of Business at the University of Burgos (Spain). His research focuses on governance, financial vulnerability, funding, and transparency of nonprofit organizations.

M. Elena Romero-Merino

M. Elena Romero-Merino, PhD, is an Associate Professor of Corporate Finance in the Department of Business at the University of Burgos (Spain). Her current research focuses on governance, knowledge, growth, funding, and financial vulnerability, with a particular emphasis on nonprofit organizations.

Marcos Santamaria-Mariscal

Marcos Santamaria-Mariscal, PhD, is an Associate Professor of Corporate Finance in the Department of Business at the University of Burgos (Spain). His current research focuses on governance, capital structure and risk, with a particular emphasis on the banking sector.