US Political Corruption and Firm Financial Policies

48 Pages Posted: 17 Aug 2015 Last revised: 16 Sep 2016

See all articles by Jared D. Smith

Jared D. Smith

North Carolina State University - Poole College of Management

Date Written: August 16, 2015

Abstract

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

Smith, Jared D., US Political Corruption and Firm Financial Policies (August 16, 2015). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2645330

Jared D. Smith (Contact Author)

North Carolina State University - Poole College of Management ( email )

Nelson Hall
Raleigh, NC 27695-8614
United States

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