Political Corruption Costs Local Companies 4% in Firm Value

University of Illinois Gies College of Business Professor Nerissa Brown wrote a tremendous paper on corruption and the value of the firms.  This impacts everything, from shareholder return to the ability of 401(k)’s to earn a return for retirees.

Firms have to weigh the cost of corruption versus the opportunity cost of locating in a particular place.  For example, in a place that is totally corrupt like Chicago, firms like McDonald’s accept the hit they take on firm value because currently the cost to moving somewhere else is higher than that corruption cost.  One thing they do is locate certain business units in other places to combat the cost of corruption.  As the world goes more virtual, it will be interesting to see what firms to with their HQ.  Can it be distributed without moving the headline HQ?

Corruption can hurt startups as well.  When cities don’t work, people don’t want to locate there.  If you look at what is happening in places like San Francisco, LA, Chicago and NYC, poor government policy and corruption are killing businesses and making it far less desirable to move there.  Other areas of the country are the beneficiaries.  Nashville and Austin are booming.

I apologize for the technical difficulties on this podcast.  We will get that fixed soon.