Corruption and International Valuation: Does Virtue Pay?

Using firm-level data from 46 countries, we investigate the relation between corruption – the misuse of public office for private gains – and international corporate values. Our analysis shows that firms from more (less) corrupt countries trade at significantly lower (higher) market multiples. This result is robust to the inclusion of many control variables suggested by valuation theory. On average, an increase in the corruption level from that of Singapore to that of Mexico corresponds to a decrease of 18.1 in the PE ratio, and a decrease of 1.17 in the PB ratio. We conclude that corruption has significant economic consequences for shareholder value.