A New Piece in the Puzzle: Corruption and Financial Constraints—Evidence From European Firms

Abstract

This study explores how country-level corruption affects firm-level financial constraints. We use a sample of 21 European countries from 2002 to 2022 comprising 22,974 firm-year observations. We find that corruption increases financial constraints. In other words, as countries become more transparent, firms face fewer financial constraints. Our findings are robust when we employ alternative definitions of corruption, financial constraints, alternative subsamples, additional firm-level control variables, and different econometric methodologies. As a further analysis, we provide novel evidence that an increase in country-level transparency decreases financial constraints only for firms with lower information asymmetry, higher institutional ownership, or higher foreign ownership. Finally, this effect is stronger for firms with lower ESG performance and firms without bribery corruption or fraud controversies. Our paper contributes to the literature by employing country-level corruption indices as a macroeconomic determinant of firm-level financial constraints for firms in developed countries and by investigating how different firm-level factors moderate the association between country-level corruption and firm-level financial constraints. © 2025 John Wiley & Sons Ltd.