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US political corruption and firm financial policies

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  • Smith, Jared D.

Abstract

Using US Department of Justice data on local political corruption, I find that firms in more corrupt areas hold less cash and have greater leverage than firms in less corrupt areas. The results are robust to including a range of controls and to using an instrumental variable approach, two alternative survey measures of corruption, and propensity score matching. Further, the association between corruption and leverage is largest among firms that operate primarily around their headquarters. Overall, the evidence is consistent with the hypothesis that firms manage liquidity downward and debt obligations upward to limit expropriation by corrupt local officials.

Suggested Citation

  • Smith, Jared D., 2016. "US political corruption and firm financial policies," Journal of Financial Economics, Elsevier, vol. 121(2), pages 350-367.
    • Handle: RePEc:eee:jfinec:v:121:y:2016:i:2:p:350-367
    DOI: 10.1016/j.jfineco.2015.08.021
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    More about this item

    Keywords

    Cash holdings; Leverage; Financial policy; Local corruption; Rent-seeking;
    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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