Does corruption drive the stock market?

Abstract

We estimate the effect of corruption on the stock markets returns using as controls gross domestic product growth, inflation, unemployment growth, monetary base growth and institutional variables. The results show that in more developed countries corruption is inversely related to the stock market returns. In developing economies, on the other hand, there is empirical evidence supporting the second-best theory: higher levels of corruption impact positively on the stock markets returns. Furthermore, while per capita gross national income cannot account for corruption coefficients on the stock market, inflation seems to be positively related to the latter.