Political Corruption and Firm Value in the U.S.: Do Rents and Monitoring Matter?

Abstract

Political corruption imposes substantial costs on shareholders in the U.S. Yet, we understand little about the basic factors that constrain or exacerbate the negative consequences of political corruption. Using federal corruption convictions data, we find that firm-level economic rents and monitoring mechanisms moderate the negative relation between corruption and firm value. Political corruption is detrimental to firms operating in low-rent product markets. Our evidence also suggests that external monitoring by state governments and monitoring induced by disclosure transparency are important mitigating factors. Our results should inform managers and policymakers of the tradeoffs imposed on firms operating in politically corrupt districts.

Keywords: political corruption, firm value, Tobin's Q