Threat of Falling High Status and Corporate Bribery: South Korean Evidence

Yujin Jeong is Assistant Professor of International Business at American University Kogod School of Business; and Jordan I. Siegel is Associate Professor (Strategy Area) and Michael R. and Mary Kay Hallman Fellow at University of Michigan Ross School of Business. This post is based on their recent article, forthcoming in Strategic Management Journal.

What leads firms to engage in large-scale bribery of politicians? High-level politicians make decisions that shape the competitive landscape in the private sector, and recent years have witnessed a global surge in cases of blatant corruption involving prominent companies and senior politicians. But theory and evidence are scant about the firm-level determinants of corporate corruption involving large-scale bribes of top government officials. This study draws on sociology, behavioral economics, and criminology to examine what we call “threat of falling high status”—the condition in which a firm with longstanding high social status is threatened with an impending loss of status due to mediocre current economic performance relative to that of its industry peers. We examine whether this unexplored socioeconomic predictor can explain variability in large-scale corporate bribery of high-level government officials. Our article uses a novel data set from South Korea, where the internal accounting records of two presidents in the 1987–1992 era have been exposed to after-the-fact legal and public scrutiny.

We conjecture that firms facing a threat to their high status—defined in our analysis as a position at the center of the elite marriage network that links powerful South Korean owner-families—are willing to engage in large-scale bribery of high-level government officials as a tool to combat such a threat. The higher the social status that a business entity initially enjoys, we hypothesize, the higher the amount of the bribes it will pay to government officials in response to a threat of falling high status. We base this hypothesis on (1) a high status firm’s desire to address the mismatch between its socially endowed high status and current-time mediocre economic performance relative to peers, (2) availability of resources to pay large-scale bribes but short-run inability to compete via market means, and (3) a prevailing belief that short-term payment of large-scale bribes will deliver politically determined resources that will help reclaim secure high-status standing.

Utilizing extensive legal documentation (court verdicts) and South Korea’s national archives—which specify how much was paid, by and to whom, for what, and when—we test the effect of threat of falling high status on the magnitude of the bribes that firms paid. The internal accounting records of the two former presidents, Chun Doo Hwan (Chun) and Roh Tae Woo (Roh), were revealed to the public in the course of the country’s democratization. Subsequently, South Korea’s 1996 “Trial of the Century” resulted in criminal convictions for both ex-presidents and the chairmen of several leading business groups, including Samsung and Daewoo. The Seoul District Court found that Chun and Roh received bribes from business groups (chaebol, or family-controlled groups of diversified businesses) equivalent to $256 million and $330 million respectively. This bribery data enable us to overcome the critical issue of data reliability and comprehensiveness in studies of corruption.

For our panel analyses, we utilize the firm-level bribery data matched with audited statutory financial statements and our hand-collected relational database that documents the marriage network linking South Korean business groups’ controlling families. Results show that controlling for a range of alternative explanations, threat of falling high status is a statistically and economically meaningful predictor of increases in amounts of large-scale corporate bribery. We also find decreases in bribes to be associated with forming a marriage tie to a senior government official or politician and with forming a close social tie to Chun or Roh; such a tie tends to replace transactional payments with a form of profit-sharing co-ownership, as predicted by Shleifer and Vishny in The Grabbing Hand: Government Pathologies and Their Cures (2002).

Our findings that firms tend to respond to threatened falling high status by engaging in large-scale bribery are particularly relevant in an institutional environment where the market and prevailing institutions reward bribery and rule-breaking sufficiently and punish them insufficiently. Our theory and findings also suggest that the concept of status in economics and sociology can be extended and moderately reformulated to help explain an important dimension of social deviance, large-scale corporate bribery.

Our findings can also be useful to those interested in how institutions can reduce bribery and its negative social-welfare effects. As we have advised field specialists at anti-corruption organizations, international institutions, and policy-oriented think tanks in Washington, New York, London, and Seoul, given the resource constraints faced by law enforcement and the media, it pays to know which types of companies should be most closely monitored, and under which conditions. In particular, it may make sense to monitor relative company status dynamically.

Our theory and evidence are pertinent to the approximately 65 emerging economies whose institutional contexts resemble South Korea’s during its pre-democratization and early democratization periods, and to developed economies that have witnessed a surge in large-scale corporate-bribery scandals in recent years.

The complete article is available here.

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