Government corruption on Brazilian capital markets: A study on Lava Jato (Car Wash) investigation

Abstract

In recent years, Brazil has faced economic and political crises resulting from the actions of an elaborate syndicate of corruption in the government. The financial literature points to two lines of thought related to corruption. One line defends the existence of benefits and the other points to losses in the public network. An event study based on the GARCHX-in-Mean model was conducted to understand the relationship between corruption and the decrease in the level of investment, and identify the potential impact of corruption on selected assets. The results indicate that there was a significant devaluation of the largest state-owned companies traded on the Brazilian Stock Exchange and in American Depositary Receipts, leading to money laundering and a decrease in economic growth. This supports the theory of long-term crisis due to corruption.

Keywords

• Event study
• return
• volatility
• GARCHX-in-mean
• corruption