Policeman for the World: The Impact of Extraterritorial FCPA Enforcement on Foreign Investment and Internal Controls

57 Pages Posted: 1 Apr 2019 Last revised: 3 Sep 2020

See all articles by Hans Bonde Christensen

Hans Bonde Christensen

University of Chicago - Booth School of Business

Mark G. Maffett

University of Chicago - Booth School of Business

Thomas Rauter

University of Chicago - Booth School of Business

Date Written: September 2, 2020

Abstract

We show that a mid-2000s increase in US extraterritorial enforcement of the Foreign Corrupt Practices Act (FCPA), characterized by greater international regulatory cooperation and more frequent use of the FCPA’s accounting provisions, has a significant deterrent effect on foreign direct investment in high-corruption-risk countries. The decrease in investment is at least as large for non-US as for US firms, suggesting that increased extraterritorial enforcement helps to level the foreign-investment playing field. Firms with fundamental characteristics that make it more difficult to maintain effective internal controls invest less in high-corruption-risk countries, suggesting regulatory compliance costs play an important role in deterring investment. Consistent with investments in accounting systems being one margin firms move on to limit enforcement risk when investing in high-corruption-risk countries, firms pursuing new investments spend more time evaluating potential acquisition targets and firms with existing investments report fewer internal-control weaknesses and restatements related to unintentional errors.

Keywords: Foreign Corruption Regulation; Extraterritorial Enforcement; Foreign Corrupt Practices Act (FCPA); Foreign Investment; Internal Controls

JEL Classification: F50; F60; K2; M4; O1

Suggested Citation

Christensen, Hans Bonde and Maffett, Mark G. and Rauter, Thomas, Policeman for the World: The Impact of Extraterritorial FCPA Enforcement on Foreign Investment and Internal Controls (September 2, 2020). Available at SSRN: https://ssrn.com/abstract=3349272 or http://dx.doi.org/10.2139/ssrn.3349272

Hans Bonde Christensen

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

Mark G. Maffett (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Thomas Rauter

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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