ABSTRACT This study investigates the ramifications of corruption penalties on corporate debt financing. By employing the implementation of China's Amendment to the Criminal Law in 2015, we show that the heightened penalties for bribery significantly reduce firms' debt financing costs located in regions with higher levels of corruption. This reduction stems from decreased entertainment expenses and alleviated financial distress of firms. Furthermore, such mitigating effect is more pronounced in firms located in regions with weaker legal institutions and non‐coastal cities, or operating in fiercely competitive markets. We also find that firms increase charitable donations following the enactment of the Criminal Law, suggesting a shift from clandestine corruption towards more subtle philanthropic endeavours to maintain relationships with the government. JEL Classification: M10, M41, G30
Li et al. (2026) studied this question.