Political Contributions and the Severity of Government Enforcement

Abstract:     
Using data on political action committee (PAC) and chief executive officer (CEO) contributions combined with data on Securities and Exchange Commission (SEC) enforcement actions from 1999 through 2010, we analyze how contributions to political campaigns affect the severity of SEC (and DOJ) enforcement outcomes. We find that contributions made by either party have a significant impact on reducing the severity of enforcement outcomes, both in terms of each outcome and across outcomes. Specifically, accused executives whose firms have contributed to political campaigns via a PAC are banned as an officer for three fewer years, serve probation for five years, prison for six fewer years and are 75% less likely to receive both prison time and an officer ban (i.e., the most severe criminal and civil penalties). An analysis of the effect of campaign contributions on an index that accounts for the severity of the enforcement outcome suggests that contributions lessen the severity of the enforcement verdict by the SEC and/or the DOJ. Executives from firms whose CEOs have contributed see similar effects. Results imply that the amount contributed seems to be less important than the fact that they contributed, suggesting that perhaps there are other factors at play such as soft money contributions (i.e., before 2002) or other interactions correlated with campaign contributions that are not legally required to be disclosed.

Number of Pages in PDF File: 30

Keywords: political contributions, SEC enforcement, DOJ enforcement, fraud

JEL Classification: G3, K4

working papers series