Political Corruption, Dodd-Frank Whistleblowing, and Corporate Investment

Abstract

We examine how local political corruption affects corporate investment. We find firms in corrupted states produce significantly less investment. The effect of political corruption on investment is more pronounced in firms with higher investment friction, higher political visibility, and poor governance. The results are robust to using alternative investment measures, alternative corruption measures, and different regression specifications. More importantly, we find that the deterrent effect of corruption on investment lessens after the Dodd-Frank Whistleblower Provision. These findings indicate corruption impedes corporate investment, but the better policy can help firms reduce the decline in firms’ investment located in corrupted states.

Keywords: Dodd-Frank, Corruption, Corporate Investment, Whistleblowers

JEL Classification: G31, G32, G38, D72