Do Local Constraints on Corporate Political Activities Really Bite? Evidence from Local Adoptions of the American Anti-Corruption Act

Abstract

We examine the consequences of local laws modeled on the American Anti-Corruption Act (“AACA”), which aims to constrain corporate political activities. Consistent with these laws significantly increasing the costs of forging local political connections, we find a reduction in the likelihood that: (i) local incumbent politicians are re-elected; and (ii) firms receive local government contracts. We also find a negative capital market reaction to the AACA — indicating that shareholders punish firms for losing valuable connections, and a decline in opportunistic reporting, suboptimal investments and corporate risk-taking. Our evidence feeds into the calls to legislate the AACA at the state (federal) level.

Keywords: American Anti-Corruption Act; Political Economy; Corporate Political Activities; Capital Market; Financial Reporting; Real Decisions

JEL Classification: D22; D72; G38; K42; M40; P16