Negation of Sanctions: The Personal Effect of Political Contributions

AFA 2013 San Diego Meetings Paper

Journal of Financial and Quantitative Analysis, forthcoming

86 Pages Posted: 18 Mar 2012 Last revised: 15 Jun 2022

See all articles by Sarah Fulmer

Sarah Fulmer

Florida State University - Department of Finance

April M. Knill

University of South Carolina - Darla Moore School of Business

Xiaoyun Yu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); European Corporate Governance Institute (ECGI); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER); China Academy of Financial Research (CAFR)

Date Written: May 6, 2022

Abstract

We show that political contributions are associated with reduced civil and criminal sanctions for fraudulent executives. These managers benefit more from contributions if their firm also gained from the fraud, if they occupy top positions in firms with weak boards, or if they contribute to powerful politicians. Political contributions reduce budgetary resources for government enforcers and lengthen the SEC’s case time-to-resolution. They also facilitate penalty transfer from fraudulent managers to the firm, resulting in their entrenchment and long-term destruction of shareholder value. Our findings highlight an agency cost of political contributions and a mechanism undermining the disciplining effect of regulations.

Keywords: Political contributions; SEC enforcement; DOJ enforcement; fraud; civil and criminal penalties

JEL Classification: G3, K4

Suggested Citation

Fulmer, Sarah and Knill, April M. and Yu, Xiaoyun, Negation of Sanctions: The Personal Effect of Political Contributions (May 6, 2022). AFA 2013 San Diego Meetings Paper, Journal of Financial and Quantitative Analysis, forthcoming, Available at SSRN: https://ssrn.com/abstract=2024069 or http://dx.doi.org/10.2139/ssrn.2024069

Sarah Fulmer

Florida State University - Department of Finance ( email )

Tallahassee, FL 32306-1042
United States

April M. Knill (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene Street
University of South Carolina
Columbia, SC 29208
United States
18502949216 (Phone)

Xiaoyun Yu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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