The impact of public officials’ corruption on the insolvency risk and financial policies of Thai private SMEs

This study investigates how corruption affects Thai private SMEs’ insolvency risk and financial policies for the period 2017 to 2021. Our findings support the ‘sanding the wheels’ hypothesis, revealing that corruption significantly raises the insolvency risk for Thai SMEs. In response, firms raise their cash holdings. The negative impact of corruption is more pronounced for mature firms and domestically owned Thai firms than for new firms and foreign-owned counterparts. While mature and domestic Thai-owned firms increase both cash reserves and leverage to manage corruption, foreign-owned firms rely more on cash holdings but do not resort to additional leverage as a financial policy. Our results are robust across various methodologies, including OLS, instrumental variable analysis, channel analysis, propensity score matching, and alternative corruption measure. Our findings highlight how firms’ characteristics shape different financial policies to navigate corrupt environments.