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Corruption, political connection, and firm investments

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  • Nguyen, Hieu Quang

Abstract

I provide evidence that U.S. firms in more corrupt areas have lower investment expenditure than firms in less corrupt areas. A one standard deviation increase in corruption rate is associated with a 8.6% decline in a firm’s investment from the median. Firms with a high degree of geographical concentration cut investment spending more aggressively in response to corruption. Notably, firms primarily scale down on research and development. I also find that political connections insulate firms from the negative impact of corruption. The investment reduction effect is almost non-existent in firms well connected to politicians. This finding further affirms the advantage that politically connected firms enjoy over non-connected firms.

Suggested Citation

  • Nguyen, Hieu Quang, 2023. "Corruption, political connection, and firm investments," International Review of Financial Analysis, Elsevier, vol. 90(C).
    • Handle: RePEc:eee:finana:v:90:y:2023:i:c:s1057521923003800
    DOI: 10.1016/j.irfa.2023.102864
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    More about this item

    Keywords

    Investment; Corruption; Political connection; Campaign contribution;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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