The Need for Speed: The Impact of Capital Constraints on Strategic Misconduct

Existing literature suggests that firms engage in misconduct in response to financial pressure. However, the extent and severity of misconduct have been challenging to determine given the lack of granular data. This limitation is particularly true for smaller firms in emerging markets whose profitability and survival depend on misconduct. This study analyzes the impact of reducing capital constraints on misconduct using high-frequency global positioning system and financing data from the minibus taxi industry in South Africa. I find that lower interest rates, a proxy for lower capital constraints, decrease the most severe forms of misconduct measured by the propensity to speed and crash yet leave more modest forms of misconduct unchanged. Qualitative interviews and survey data suggest that these results are attributable to firms’ efforts to avoid default. These findings contribute to understanding misconduct as a firm strategy when facing financial pressure and suggest that lower capital constraints might improve firm survival and public safety. This paper was accepted by Lamar Pierce, organizations. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.01957 .

Duke Scholars

Author Christopher Eaglin Fuqua School of Business