Corruption and private equity activity: fear and loathing in emerging markets

Abstract: Analysing 69,518 private equity transactions worldwide, we find that higher perceived corruption levels negatively affect private equity activity, measured as aggregate investment value as well as number of transactions. Investors deliberating investing in a particular country shy away from potential ethical and practical conflicts. Thus, the markedly high perceived corruption levels in emerging- and frontier markets obstruct local private equity markets, and ultimately private sector development overall. Corruption explains up to 30% of the gap in private equity activity between developing- and developed countries. We find indicative evidence of a non-linear relationship, implying that countries are considered as investable once sufficiently free from corruption. We do not confirm notions that corruption affects foreign- and domestic private equity capital flows differently.