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THE IMPACT OF ANTI-CORRUPTION POLICIES ON THE PROFITABILITY AND GROWTH OF FIRMS LISTED IN THE STOCK MARKET –APPLICATION ON SINGAPORE (PANEL DATA ANALYSIS

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The study uses panel data regression to examine the effect of corruption on firm profitability and growth in 392 listed firms in Singapore Stock Exchange for the period 1995 to 2013. We used 2 models; in the first model we measure the relation
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  The 14th International Conference on Economy & Business, Bulgaria 1-5 Sep.2015 THE IMPACT OF ANTI-CORRUPTION POLICIES ON THE PROFITABILITY AND GROWTH OF FIRMS LISTED IN THE STOCK MARKET ÐAPPLICATION ON SINGAPORE (PANEL DATA ANALYSIS) Ahmed Badawi and Anas Al-Qudah American University of the Middle East (AUM), Block 3, Building 1, Egaila, Kuwait Abstract The study uses panel data regression to examine the effect of corruption on firm profitability and  growth in 392 listed firms in Singapore Stock Exchange for the period 1995 to 2013. We used 2 models; in the first model we measure the relation between corruption and profitability measured by net profit margin. Under this model we run 2 sub models; in the first we added only micro variables to corruption, in the second we incorporated macro and micro variables together. The second model we measure the relation between corruption and company growth measured by total asset growth. Under this model we run 2 sub models; in the first we added only micro variables to corruption, in the second we incorporated macro and micro variables together. The main conclusion of this study is that anti-corruption policies that was conducted in Singapore over the period 1995 to 2013 resulted in better firmÕs performance measured by net  profit margin (1 point index improvement increases net profit margin by about 12.8%) and asset  growth (1 point index improvement increases total asset growth by about 11.7%). Key words:  corruption, firm profitability, firm growth. #$%&'()*%#'$ Anti-corruption policies have been instituted over the past few decades in countries around the globe to limit the economic and government impacts of corruption, both politically and economically. Economists, researchers, and politicians have claimed these policies are needed to mitigate corruption risks, especially in developing countries that may be more susceptible to corruption. Although these policies have been around in increasing numbers over the past few decades, the type of research studies that have been conducted about anti-corruption policies has  been fairly limited in scope. This research paper aims to discover the impact of anti-corruption policies on the  profitability and growth of the listed firms in Singapore Stock Market. Singapore is the perfect country to use for this research study, as Singapore has become known as one of the least corrupt  countries in the world despite its old history of rampant corruption. If the full benefits of anticorruption policies on the economic conditions of the country are to be explored, it is important to detail (on both micro and macro levels) how different variables impact how anticorruption policies will be realized for the economy that implements such policies. There is a gap in the current literature with regards to how the finances of this country are impacted. Before this research study can adequately determine how anticorruption policies impact the firmsÕ profitability, the existing literature will need to be examined. +   ,--,*%. '- /$%#0*'&&)1%#'$ 1'2#*,. +3 .456 789 :899;< = >?@AB 456 >4@AB One of the research studies analyzed Ôhow AML systems could significantly augment anti-corruption efforts, focusing on the importance of financial intelligence, asset confiscation, and international cooperation (J. Sharman & D. Chaikin, 2009). Anti-money laundering systems go hand in hand with anticorruption policies, as money laundering is often one of the avenues that corruption occurs. They found that this can be an important tool in deterring widespread corruption in the countries studied. Additionally, there are different types of corruption, meaning not all types of corruption are the same or react as negatively in the marketplace. Researchers found that there is Ôcorruption that gives rise to a reciprocal exchange of goods or services (Òtransaction corruptionÓ) and corruption where the goods or services move in a single direction (embezzlement of funds, fraudulent appropriation, etc.) (G. Guiheux, 2007). In the case of transactional corruption, this type of corruption would not impact the economy in the same types of ways. Conversely, if the latter type of corruption were removed from the market, it would positively benefit the economy by limiting embezzlement and fraud. There is also great debate on how effective anticorruption initiatives are in terms of actually creating lasting reform. The Ôimplementation of an anti-corruption package results in varying, and often minimal, levels of actual reform (V. Hiranandani, 2010). In the case of Singapore, more information needs to be evaluated to determine if the actual reform stemmed from anticorruption initiatives and policies. Some research has suggested that the level of governance has more to do with the effect of corruption or anticorruption policies on economies; for instance, the Ônegative effect of  corruption on economic growth is stronger if a country has poor governance (M. Swaleheen, 2008). This means that countries with strong governance may face less of an economic impact from corruption than countries with weaker governance. Many countries, regardless of strength of governance are focused on anti-corruption tactics. Many of them rank their Ôhighest priority to combating corruption and enforcing the rule of law (G. Hainsworth, 2007). This makes a research study about the economic impact of anti-corruption policies especially relevant. Some finance professionals think there are other types of corruption that weaken the stock market, specifically. One former financial professional believes that Ôinsider influence is so  pervasive in the financial market that investors should avoid individual stocks completely.Õ 1  While this type of corruption may be difficult to monitor in terms of the impact of anti-corruption policies, it is a type of corruption that has an impact and should not be ignored in further research studies. Some studies have analyzed how corruption impacts the financial sector specifically. They have found that the Ôthe return to financial sector development at the level of massive corruption, exacerbate income inequality, offsetting the benefits of financial development (S. Batabyal & A. Chowdhury, 2015). For many Asian countries, this can be a massive challenge caused from corruption, whether government or economy-focused. The research that has already been conducted about corruptionÕs impact on productivity has demonstrated that corruption can be problematic in that Ôcorruption is likely to lower the  productivity of capital due to a variety of channels (J.G. Lambsdorff, 2003). Lowered  productivity of capital means a lowered level of profitability. Any research project about anti-corruption policies needs to analyze how different types of corruption impact profitability. A different avenue of research examines how people perceive corruption. One group of researchers studies the aversion to corruption (O.E. Johnson, 1975). Ordinary citizens are generally risk averse. Their perception of anticorruption policies may have an impact on the type of corruption that exists and how corruption is remedied. Researchers often acknowledge that anticorruption policies and the long-lasting effects of them require many different types of research. The Ôanti-corruption literature is a first attempt to 1  'Confessions of a Wall Street Analyst: A True Story of Inside Information and Corruption in the Stock Market', 2006,  Publishers Weekly , vol. 253, no. 1, 2006, p. 53.  identify systematically significant trends so far and challenges remaining to future political science research (D. Schmidt, 2007). While this is important, it brings up a different point for consideration. It is perhaps unlikely to Ôovercome an inheritance of corruption in only a few decades (P. Larmour, 2014). More long-term studies will need to be conducted to determine its full impact. An aid relief worker admitted that it was Ôpointless to solicit donations before addressing the  problem of corruption (C. Berlinski, 2009). She found that issues of corruption needed to be dealt with politically. This may mean that countries that successfully incorporate anticorruption  policies into their infrastructure may receive more aid relief donations than other countries who have not overcome this corruption. This could contribute to how successful, economically, a country is perceived. The Ôkey to curbing corruption is the enactment of appropriate rules as well as having in place good menÑmen who are incorruptibleÑto enact and enforce the rules (S. Choon-Yin, 2005). From the existing literature, it appears that Singapore is on the right track to implement this sort of widespread change. Additionally, researchers have been interested in how poor countries and corrupt countries intersect. First, Ôthe assumptions that corruption is motivated only by financial considerations and that developing countries are corrupt primarily because they are poor are myths (A.V. Roman, 2012). A countryÕs economic status does not appear to have a direct correlation to corruption. Secondly, it appears that anticorruption policies do not guarantee success, or even well-functioning governments. Researchers found that Ôdespite the presence of strong anti-corruption policies, state and regulatory capture may persist and thrive in the highest echelons of government (A.M. Mutebi, 2008). Researchers studied anti-corruption policies employed in other countries known to face corruption. They hypothesized the relationship between Ôdemocracy promotion and anti-corruption strategies (J. Bridoux & A. Gebel, 2012). However, it does not appear to have such a strong correlation. When researchers studied the role of governments in preventing corruption in Korea, they found the link to be weak (K. Byong-Seob, 1998). In Russia, they discovered that Ôthe end of socialism has generated another surprise: an extraordinary amount of official corruption and Mafia-style crime (F. Varese, 2007). In terms of Singapore, research has suggested that ÔSingaporeÕs success in minimizing corruption can be attributed to its dual strategy of reducing both the opportunities and incentives for  corruption (J.T. Quah, 2001). The strategy appears to be working and may be duplicable in other countries looking to apply the same tactics. This research project will uncover its economic impacts. Corruption hinders the countryÕs ability to generate revenues, it pushes firms under-ground, and leads to ever-higher tax rates being levied on fewer taxpayers, in turn, it reduces the StateÕs ability to provide essential public goods such as enforcement of the law and also hinders the effective flow of aid flows (Rose-Ackerman, 2013, p.112). I)   Growth Corruption has a negative impact on economic growth. A cross-section study across 45 countries showed that corruption has an impact on the growth of the economy. It was found out that a unit increase in the corruption level led to the reduction of the growth rate by about 0.72%, therefore, one unit increases corruption index growth rate by 0.545% points. For a sample of ninety-seven countries, those with higher corruption have a lower economic growth rate. Tanzi and Davood (2002). This theoretical argument was based on, the contribution of Small and Medium-Size Enterprises (SMEs) to the economy inter alia, and the linkages  between size of an enterprise, corruption and economic growth. They are then driven out of  business since they tend to operate in markets that are competitive. SMEs are the engines of growth; hence their decline in the market reduces the growth rate of the economy. II)   Development Corruption is higher in poor countries. Developed countries are relatively efficient when it comes to transactions that have to be done fast and transparent. Corruption makes sales slow, unpredictable and inefficient (Rose-Ackerman, 2013, p. 272). When honesty is upheld, there is an increase in economic levels. For a country to grow rich, it should practice morality since it is a time-saving device that enhances growth. III)   Public Sector Corrupt public officials appointed through nepotism or bribes tend to create situations in which they can extort money. This reduces productivity and quality of services. This contributes to excessive public expenditures and poverty. As a result, corruption should be curbed appropriately.
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