The Impact Of Local Political Corruption on Firms’ Narrative R&D Disclosures

Abstract

This study examines the relation between U.S. local political corruption and firms’ narrative research and development (R&D) disclosures. Using the number of regional corruption convictions of public officials around firms’ headquarters to capture local political corruption, we find that firms in more corrupt areas reduce not only the number of R&D sentences in their 10-K filings but also the amount of numerical information and forward-looking information contained in these R&D sentences. These results are robust to the use of three alternative measures of local political corruption and the use of staggered adoption of anti-corruption laws as plausible exogenous shocks. Furthermore, we observe that these results are more pronounced for firms with concentrated operations in their headquarter states and firms with R&D activities that are more influenced by government policy. Additionally, we find that local political corruption increases the delay in firms’ patent disclosures with the U.S. Patent and Trademark Office and increases their overall proprietary disclosures using redaction in 10-K filings. Overall, our study suggests that local corruption is detrimental to firms’ narrative R&D disclosures.

Keywords: political corruption, narrative R&D disclosures, corporate voluntary disclosures, rent-seeking