Anticorruption advocates—including those in the private sector who have taken the fight against corruption seriously—insist that bribery is bad for business. That’s likely true in the aggregate, and perhaps it’s true for some individual firms. But it’s probably not true for all firms—otherwise, why would so many of them pay bribes? But it’s hard to know how much firms benefit from bribery. Likewise, while would be useful to know more about the factors that affect the size and probability of bribery, figuring this out is a challenge because of the secrecy of corrupt transactions.

In a recent working paper, Yan Leung Cheung, P. Raghavendra Rau, and Aris Stouraitis try to get at these questions by looking at enforcement data for anti-bribery laws–both laws that apply domestically and those (like the U.S. FCPA and the UK Bribery Act) that prohibit foreign bribery. In particular, the study examines a subset of reported cases where (1) a bribe was (allegedly) paid for a particular, identifiable public contract, announced on a specific date, (2) there is stock and financial data for the firm, available on a day-to-day basis, and (3) the enforcement data contains information on the size of the bribe paid to secure the contract. Armed with that information, the authors reason that we can use the abnormal increase in firm market capitalization that coincides with the announcement of the contract as a measure of the gross benefit of the bribe to the firm (the authors assume that bribe-paying firms would not have gotten the contract without paying the bribe). We can then subtract the size of the bribe from that gross benefit to get the net benefit of bribery for the firm. On top of that, the authors reason that we can learn something about how the total gains from the bribe transaction are allocated between the firm and the corrupt public official by dividing the size of the bribe payment by the sum of the bribe payment plus the gross benefit of the bribe. The higher this ratio, the more the benefits of bribery go to the public official; the lower this ratio, the more the benefits of bribery accrue to the bribe-paying firm.

The authors examine the data from a variety of different angles, and explore a range of questions, so I won’t try to summarize it all here. It’s well worth a read. Let me note what I took to be the most interesting and important findings, and then add a few notes of caution about the results.

• First, the study reaches the depressing but unsurprising result that bribery pays—a lot. For those firms in the sample, each dollar spent on bribery increases the firm’s market capitalization by somewhere between $10 and $12. That’s a huge return on investment, and underscores just how challenging it is to deter firms from engaging in this sort of corruption.
• Second, the study reveals some interesting subtleties about the bargaining relationship between firms and government officials. For firms that pay bribes to relatively low-ranking officials, the firm tends to receive a greater share of the surplus (that is, the size of the bribe is small relative to the total value of the contract). But when high-ranking officials like ministers or heads of state are involved, the official gets most of the surplus, to the point where it’s not clear that the firm realizes much of a net benefit. This finding suggests that although firms dealing with low-ranking bureaucrats can extract valuable benefits at relatively low cost, the positions are reversed when high-level officials are involved—in those cases, the officials are in the driver’s seat.
• Third, firms that are less efficient (as proxied by lower market-to-book ratios, lower profit margins, lower return on equity, and other measures) generally pay higher bribes than more efficient firms–but they do not receive higher benefits from bribery than more efficient bribe-paying firms. This finding contrasts with the “efficient bribery” hypothesis, which posited that more efficient firms could afford to pay higher bribes, and therefore bribery could lead to an efficient allocation of government contracts. Not so, according to this study. Rather, it’s the less efficient firms that tend to pay bigger bribes—perhaps because they cannot win contracts without doing so.
• Fourth, and perhaps most important for anticorruption policy, the study finds certain characteristics of the countries involved—both the source countries (home of the companies paying the bribes) and the destination countries (where the bribes are paid)—have an effect on bribe size. In particular, bribes are smaller when the legal system makes it easier for shareholders in the source country to hold company directors accountable, when source country newspaper circulation is higher, when politicians in the destination country have to disclose their assets, when destination countries have more reliable police, and when customs burdens in the destination country are higher. These findings seem consistent with other findings suggesting that transparency, accountability, and effective law enforcement help control corruption—but what’s interesting here is that we’re only looking at cases where bribes were actually paid. That is, even when the above factors are not sufficient to deter bribery from taking place, they still tend to lead to smaller bribes being paid.

These are all interesting findings, and overall it’s a terrific study, but there are a few important caveats it’s important to keep in mind (most of which the authors candidly acknowledge and discuss).

Perhaps most important, the sample consists only of cases where law enforcement found out about the alleged bribery and took action. The working assumption is that these cases are a representative sample of all bribe transactions. But there are reasons to suspect that might not be true. Law enforcement might learn about, or decide to pursue, certain kinds of cases—say, cases from certain countries, or involving certain firms or industries, or certain kinds of bribes.

Also, it’s important to keep in mind that the bribe amounts reported in official law enforcement documents—particularly charging documents or settlement agreements—may not accurately reflect the actual amounts of money involved. These public documents are usually the subject of intensive negotiations between the public enforcers and the target firm. Under some circumstances, the government may include allegations of bribes (or bribe sizes) that are larger than what the government has solid evidence to support; in other cases, the firms may succeed in convincing the government to lowball the bribe figures as part of the settlement negotiations. Of course, all measures are imperfect, and if this is just random noise, it’s not much of a problem. But it’s possible that the deviations from the true amounts are not entirely random, and it’s important to keep in mind that the figures that appear in public law enforcement documents may not always reflect the government’s actual best estimate of the bribes involved.