Negation of Sanctions: The Personal Effect of Political Contributions

51 Pages Posted: 18 Mar 2012 Last revised: 10 Feb 2020

See all articles by Sarah Fulmer

Sarah Fulmer

Florida State University - Department of Finance

April M. Knill

Florida State University College of Business; Florida State University - College of Law

Xiaoyun Yu

Indiana University - Kelley School of Business - Department of Finance; China Academy of Financial Research (CAFR)

Date Written: February 9, 2020

Abstract

We examine the effect of political contributions on the severity of civil and criminal sanctions for fraudulent executives. Contributing executives receive smaller monetary fines, are banned fewer years as an officer or director of a public company, and serve less time in prison or on probation. We identify two potential channels through which political contributions allow fraudulent managers to dodge harsh sanctions: lengthening the case time-to-resolution with the Securities and Exchange Commission, and increasing the likelihood that their cases are resolved through a settlement or plea bargain with government agencies instead of a court judgment. Importantly, political contributions facilitate a shift in penalties from fraudulent managers to shareholders, thereby decreasing the probability of their termination after the fraud. The entrenchment of these managers leads to further damage to shareholders. Our findings highlight an agency cost arising from political contributions and identify a mechanism that undermines regulations’ disciplining effect for fraudulent managers.

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 (February 9, 2020). AFA 2013 San Diego Meetings Paper. 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)

Florida State University College of Business ( email )

Tallahassee, FL 32306-1042
United States
(850) 644-2047 (Phone)

Florida State University - College of Law ( email )

425 W. Jefferson Street
Tallahassee, FL 32306
United States

Xiaoyun Yu

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3521 (Phone)
812-855-5875 (Fax)

China Academy of Financial Research (CAFR)

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

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