Corruption and corporate leverage in an emerging economy: The role of economic freedom

Abstract

This study investigated the effects of corruption and economic freedom on corporate leverage. We also evaluated how economic freedom shapes the effect of corruption on corporate leverage. Using a sample of Vietnamese firms covering a nine‐year period from 2010 to 2018, we find evidence that increased control of corruption has a significant positive impact on firm leverage, whereas the opposite is true for economic freedom. This effect is robust to alternative measures of control of corruption as well as advanced estimation methods, such as firm‐fixed effects and quantile regressions. Our results also reveal that the positive impact of corruption controls on corporate leverage is more pronounced for firms with high economic freedom. Econometrically, our findings indicate that firms with better control over corruption prefer debt financing, as demonstrated by their higher leverage ratio.