US Political Corruption and Firm Financial Policies
48 Pages Posted: 17 Aug 2015 Last revised: 16 Sep 2016
Date Written: August 16, 2015
Using U.S. Department of Justice data on local political corruption, I find that firms in more corrupt areas hold less cash and have greater leverage than firms in less corrupt areas. The results are robust to including a range of controls and to using an instrumental variable approach, two alternative survey measures of corruption, and propensity score matching. Further, the association between corruption and leverage is largest among firms that operate primarily around their headquarters. Overall, the evidence is consistent with the hypothesis that firms manage liquidity downward and debt obligations upward to limit expropriation by corrupt local officials.
Keywords: cash holdings, leverage, financial policy, local corruption, rent-seeking
JEL Classification: G31, G32, G38, D72
Suggested Citation: Suggested Citation