The misconduct ripple: how corruption and unethical practices affect performance across firm age and size

Purpose – Amid conflicting narratives on how mismanagement or corruption shapes corporate performance, this study examines the uneven ripple effects of managerial misconduct, exploring how its impact varies across firms of different sizes and ages and how these characteristics amplify or mitigate its consequences. Drawing on agency theory, it hypothesizes that corruption increases agency costs, thereby reducing performance, particularly in younger and smaller firms with limited resources. Design/methodology/approach – This study employs a multi-country cross-sectional dataset comprising 3,151 nonfinancial companies from 31 European countries, combining financial data with information on managerial mismanagement. To address potential endogeneity, it applies a two-stage least squares (2SLS) approach using instrumental variables. Findings – Findings indicate that managerial corruption negatively affects firm performance, particularly in smaller and younger firms. The most notable result is the moderating role of financial constraints, proxied by firm size and age, in the relationship between corruption and performance. Larger and older firms tend to experience a less adverse impact, possibly due to economies of scale in managing corruption or the presence of more robust internal controls. Furthermore, the effects of corruption vary across industries. Robustness tests confirm these results. Research limitations/implications – The main limitation of this study is its reliance on a cross-sectional dataset. Practical implications – This study highlights the need for tailored anti-corruption strategies, particularly in smaller and younger firms where the negative impact of corruption is strongest, suggesting that managers and policymakers should implement robust governance measures. Social implications – Corruption within companies not only reduces profitability but also erodes trust among stakeholders, from employees to the public, ultimately affecting communities and societies at large. Therefore, detailed and transparent disclosure of anti-corruption efforts is essential to rebuild trust and demonstrate a commitment to integrity. Originality/value – This study is original in its firm-level approach to measuring the impact of corruption on performance, using a novel metric based on the percentage of managers facing sanctions, enforcement actions or adverse media coverage. It is also among the first to empirically examine how firm size and age moderate the effects of corruption on performance.