Corporate Lobbying and Fraud Detection
China Europe International Business School
Indiana University Bloomington - Department of Finance; China Academy of Financial Research (CAFR)
June 9, 2010
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
This paper examines the relation between corporate lobbying and fraud detection. Using data on corporate lobbying expenses between 1998 and 2004, and a sample of large frauds detected during the same period, we find that firms’ lobbying activities make a significant difference in fraud detection: compared to non-lobbying firms, firms that lobby on average have a significantly lower hazard rate of being detected for fraud, evade fraud detection 117 days longer, and are 38% less likely to be detected by regulators. In addition, fraudulent firms on average spend 77% more on lobbying than non-fraudulent firms, and spend 29% more on lobbying during their fraudulent periods than during non-fraudulent periods. The delay in detection leads to a greater distortion in resource allocation during fraudulent periods. It also allows managers to sell more of their shares.
Number of Pages in PDF File: 60
Keywords: corporate lobbying, corporate fraud, corporate governance
JEL Classification: G3, K4Accepted Paper Series
Date posted: January 2, 2007 ; Last revised: July 26, 2010
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