Does Bribery Pay? Evidence from Credit Ratings

Using manually collected data associated with bribery in China, we find that firms receive higher credit ratings when their travel and entertainment expenses are abnormally high. Higher credit ratings help firms to expand their debt capacity, which incentivizes issuers to bribe rating firms for rating favor. We find no evidence that the results are driven by bribery of government officials or bond underwriters. Exploiting the exogenous shock from China’s unprecedented anti-corruption campaign, we show that the effect of entertainment on credit rating is causal. The results are more pronounced during credit crunches and for firms with limited access to external finance. Overall, we identify a specific, external financing channel for bribery to create value for issuers and our study is among the first to quantify the marginal effect of bribery on firm value.