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Does corruption matter for stock markets? The role of heterogeneous institutions

Lakshmi, Geeta; Saha, Shrabani; Bhattarai, Keshab


Geeta Lakshmi

Shrabani Saha



In examining the role of institutions in resisting corruption and its impact on growth, most studies concentrate on the aggregate level and conclude that sound institutions enhance growth. We focus instead on varying dimensions of heterogeneous institutions in the presence of corruption and their interactive effect on stock returns in four emerging economies: Brazil, Russia, India, and China (BRIC). We pay particular attention to democratic accountability, bureaucratic quality, and law and order. Using monthly data for the first time in this literature, we find that corruption and other weaker institutions lower stock returns during the period 1995-2014. However, interaction effects show interesting mixed results: Bureaucratic quality can mitigate the ill effects of corruption and increase returns by reducing red tape, whereas corruption distorts law and order and lowers stock returns. Our findings suggest that policies to enhance bureaucratic efficiency can abate the adverse effects of corruption, but a restrictive law and order environment tends to lower stock returns.


Lakshmi, G., Saha, S., & Bhattarai, K. (2021). Does corruption matter for stock markets? The role of heterogeneous institutions. Economic modelling, 94, 386-400.

Journal Article Type Article
Acceptance Date Oct 18, 2020
Online Publication Date Oct 22, 2020
Publication Date Jan 1, 2021
Deposit Date Oct 31, 2020
Publicly Available Date Oct 23, 2021
Journal Economic Modelling
Print ISSN 0264-9993
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 94
Pages 386-400
Keywords Institutions; Stock returns; BRIC countries; Growth; Corruption
Public URL
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