An Analysis of Firms' Self-reported Anticorruption Efforts

We use Transparency International's ratings of self-reported anticorruption efforts for 480 corporations to analyze factors underlying the ratings. Our tests examine whether these forms of disclosure reflect firms' real efforts to combat corruption or are cheap talk. We find that the ratings are related to enforcement and monitoring, country and industry corruption risk, and governance variables. Specifically, firms with high anticorruption ratings are domiciled in countries with low corruption risk ratings and strong anticorruption enforcement, operate in high corruption risk industries, have recently faced a corruption enforcement action, employ a Big Four audit firm, and have a higher percentage of independent directors. Controlling for these effects and other ratings determinants, we find that firms with lower residual ratings have higher subsequent citations in corruption news events. They also report higher future sales growth and show a negative relation between profitability change and sales growth in high corruption geographic segments, but not in low corruption segments. The net effect on valuation from sales growth and changes in profitability is close to zero. The findings are robust to a number of sensitivity tests, including analysis of a narrower set of self-reported anticorruption efforts for a larger sample over multiple years. Given this evidence, we conclude that, on average, firms' self-reported anticorruption efforts signal real efforts to combat corruption and are not merely cheap talk.