Government corruption is the misuse of public office for private gain, affecting the quality of life for the citizens. Corruption warps government policy, harming things like education, infrastructure, and healthcare. It also damages democracy, stoking distrust of the government and its institutions. In the United States, this distrust fueled a scorched-earth political landscape where accusations of corruption are used as partisan cudgels. This has led to a collapse in public confidence in government and reduced participation in civic activities, including voting.

In a country with poor institutions, a corrupt official can buy off public servants to bypass bureaucratic processes, which in turn reduces the efficiency of business and raises costs for the economy. The US has experienced this many times over its history, including the robber barons of the Gilded Age who took advantage of government corruption to buy off regulators.

Corrupt officials can also damage the economy by buying off foreign investors, driving away investment and distorting the local market. This leads to a decline in productivity, wages, and employment. A stock market crash can follow as investors withdraw from the country, creating an even worse economic environment.

Previous work on the impact of corruption has largely focused on its effects on growth, with less attention to the stock market dimensions of corruption. This paper investigates how the market reacts to disclosure of corruption risk by analysing stock market performance in countries with different institutional quality. We find that the negative effect of corruption on a country’s stock market is moderated by democratic accountability, bureaucratic quality, and law and order.