Local corruption and SME cash holdings in an emerging market

This paper examines how local corruption influences cash holdings of small and medium sized enterprises (SMEs). We argue that SMEs have little agency problem and weak bargaining power with corrupt officials; therefore, they are more likely to shield cash from rent-seeking. With a sample of 361,000 SMEs over the period 2013–2019, we find that local corruption reduces SME cash reserves. This negative relationship is stronger when firm size is smaller. Moreover, we find that local corruption also drives firms to accumulate less cash from their cash flows.