Thursday, February 10, 2011

Corruption drags down the VALUE OF FIRM!

So far 'level of corruption' in a country has not been considered exclusively in valuing a firm, rather it has been viewed as part of the country risk. Even, so far 'corruption' has been viewed as ethical issue and has been treated only on moral grounds. Its exclusive impact has never been factored in the valuation as we have not concretely realized its economic consequences. However, the corruption within the firm has been the prominent issue in terms of its implications to 'corporate governance'.

Recently in a study by Prof. Lee from Standford Graduate School of Business, provided the evidence that level of corruption in a country significantly influences the firms' valuation within that economy. Firms in the countries with high level of corruption tend to be valued at low when compared to their counterparts in other countries where the level of corruption is low. I feel it is a serious issue for the investing community to factor in 'level of corruption' or assign more weight to it in the variable which measures country level risk. As market expected to value low, entrepreneurs need to reconsider their plans to start their businesses in the corruption ridden countries.

Though further research is required to consider the gravity of issue, it seems the countries and even the citizens have plain incentives to fight for corruption free world!

Here is the link to the original paper. [Link]

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