Local Corruption, Whistleblowing, and Debt Financing

Abstract

The paper investigates whether and how a state’s local corruption environment affects firms’ financing costs. We find that firms in high-corruption states are associated with significantly higher loan spreads and tighter loan covenants. We use an instrumental variable approach and a quasi-experiment of firms’ headquarters re-locations to establish causality. Moreover, the passage of whistle-blowing laws, in the name of anti-corruption, increases firms’ bank loan costs and amplifies the impact of local corruption. Overall, we document the externality of local corruption environment on resident firms’ financing costs and the unintended outcomes of whistle-blowing laws.