We examine how bribes may affect corporate performance using a quasi-natural experiment. Specifically, we exploit the 2016 enactment of the Improper Solicitation and Graft Act in Korea which limits provision of gifts and entertainment to public sector employees as an exogenous shock to bribery practices. We find that a firm’s level of bribery activities, instrumented by industry-level government exposure, has a negative impact on its performance. In particular, a reduction in predicted bribery activity results in a significant improvement in operating performance. Overall, our findings provide convincing evidence that bribery may impair corporate performance.

Keywords: bribes, anti-graft law, firm performance, regulation, entertainment expense 

JEL classification: D73, G32, G38