Corruption versus societal trust—New evidence from Poland's limited liability companies

• DOI: http://doi.org/10.1002/jcaf.22405
• Date: 01 October 2019
• Published date: 01 October 2019
• Author: Anna P. Malinowska

BLIND PEER REVIEW

Corruption versus societal trust—New evidence from Poland's

limited liability companies

Anna P. Malinowska

CASE Center for Social and Economic

Research, Warsaw, Poland

Correspondence

Anna P. Malinowska, CASE Center for

Social and Economic Research, Al. Jana

Pawła II 61B, Warsaw, Poland.

Email: anna.malinowska@case-research.eu

Abstract

Over the last decades, institutions, especially informal institutions, have become

important determinants of economic dynamics, both in the microscale and macro-

scale. Even though, two of the most important social phenomena, corruption and

societal trust, have remained under-researched vis-à-vis corporate financial poli-

cies. This study, presenting novel and rigorous econometric evidence, aims to fill

this gap. The results, obtained after controlling for endogeneity via the application

of a two-step system general method of moment for dynamic panel data, for 2,665

Polish limited liabilities companies active in the period 2007–2016, highlighted

several important issues. First, as regards corruption appeared to negatively impact

firm cash balances and flows. Indeed, companies decreased their cash flows and

cash balances to shelter themselves from expropriation and additionally actively

engaged in transparency management to make their financial situation more opaque

and less attractive in terms of extortions. Second, societal trust emerged as impor-

tant and increased firm cash balances and cash flows. What is more, national

accounting standards as well as access to external financing, the banking system

specifically, boosted firm cash balances and cash flows. We argue that all the three

factors increased firm-level transparency.

KEYWORDS

corporate policy, corruption, institutions, liquidity, Poland, trust

JEL CLASSIFICATION

G32; G30; P37; P14

1|INTRODUCTION

In a highly interconnected world of today, institutional fac-

tors have become significant determinants of economic

dynamics, both at the macrolevel and microlevel. Among

them, informal institutions, such as corruption and trust,

while pervasive in the real world, have remained under-

researched in academic studies. Some studies dealt with the

impact of the former on macroeconomic issues, such as for-

eign direct investment (FDI) and economic growth

(e.g., Mauro, 1995), yet empirical investigations regarding

the influence of either corruption or trust on corporate policy

remain fewer (Asiedu & Freeman, 2009; Malinowska, in

press). This is despite the fact that firm financial decisions

constitute channels via which companies evade rent seeking

while external environment, such as national regulatory

frameworks, provide extortive tools for State officials to

influence private agents (McChesney, 1987). In such

circumstances, there emerge two behavior patterns followed

by companies: firms either resorted to transparency

Received: 7 June 2019 Revised: 18 June 2019 Accepted: 20 June 2019

DOI: 10.1002/jcaf.22405

J Corp Acct Fin. 2019;30:85–98. wileyonlinelibrary.com/journal/jcaf © 2019 Wiley Periodicals, Inc. 85