Political Values, Culture, and Corporate Litigation

Abstract

Using one of the largest samples of litigation data to date, we examine whether the political culture of a firm determines its propensity for corporate misconduct. We measure political culture using the political contributions of top managers, firm PACs, and its local residents. We show that firms with Republican culture are more likely to be the subject of civil rights, labor and environmental litigation than Democratic firms, consistent with the Democratic ideology that emphasizes equal rights, labor rights, and environmental protection. However, firms with Democratic culture are more likely to be the subject of litigation related to securities fraud and intellectual property rights violations than Republican firms whose Party ideology stresses self-reliance, property rights, market discipline, and limited government regulation. Upon litigation filing, both types of firms experience similar announcement reaction, which suggests that the observed relation between political culture and corporate misconduct is unlikely to reflect differences in expected litigation costs.

Keywords: Political values, culture, litigation, managerial misconduct, Corporate Misconduct

JEL Classification: G34, M14, D21, A13, K22, K31, K32