Corrupt governmentstock market crash
Corruption is widely considered to be a major obstacle for economic development. Various studies show that economies with high levels of corruption have lower incomes, suffer from higher infant mortality rates, and are more likely to experience stock market crashes. Although it is difficult to eliminate corruption completely, governments can improve governance and reduce its negative impact on the economy.
Stock market crashes can be triggered by a variety of factors, such as poor investor confidence, the existence of a bubble, or excessive speculation. However, a common cause of these crashes is local corruption, which can influence the stock market in many ways. The recent collapse of the Iranian stock market, which wiped out the savings of two to three million people, shows the effects of the regime’s corruption and mismanagement.
While previous work mainly explores the role of firms’ internal factors on crash risk, we study the effect of local corruption on stock market crashes at the macro level by using a unique new data set. We also propose a new model that incorporates the impact of corruption and governance on stock market crashes.
This research provides empirical and theoretical evidence that controlling corruption can significantly decrease stock market crash risk in Pakistan. Corruption negatively affects the stock market performance by reducing investor confidence in the country and causing political instability. Furthermore, corruption increases the stock market crash risk by increasing firm capital cost, reducing operating efficiency and suppressing firm growth.
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