Corporate Lobbying and Fraud Detection

60 Pages Posted: 2 Jan 2007 Last revised: 1 Dec 2017

See all articles by Frank Yu

Frank Yu

China Europe International Business School

Xiaoyun Yu

Indiana University Kelley School of Business; European Corporate Governance Institute (ECGI); China Academy of Financial Research (CAFR)

Date Written: June 9, 2010

Abstract

This paper examines the relation between corporate lobbying and fraud detection. Using data on corporate lobbying expenses between 1998 and 2004, and a sample of large frauds detected during the same period, we find that firms’ lobbying activities make a significant difference in fraud detection: compared to non-lobbying firms, firms that lobby on average have a significantly lower hazard rate of being detected for fraud, evade fraud detection 117 days longer, and are 38% less likely to be detected by regulators. In addition, fraudulent firms on average spend 77% more on lobbying than non-fraudulent firms, and spend 29% more on lobbying during their fraudulent periods than during non-fraudulent periods. The delay in detection leads to a greater distortion in resource allocation during fraudulent periods. It also allows managers to sell more of their shares.

Keywords: corporate lobbying, corporate fraud, corporate governance

JEL Classification: G3, K4

Suggested Citation

Yu, Frank and Yu, Xiaoyun, Corporate Lobbying and Fraud Detection (June 9, 2010). Journal of Financial and Quantitative Analysis (JFQA), 2011, Available at SSRN: https://ssrn.com/abstract=954368

Frank Yu (Contact Author)

China Europe International Business School ( email )

669 Hongfeng Road
Pudong
Shanghai, 201206
China

Xiaoyun Yu

Indiana University Kelley School of Business ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3521 (Phone)
812-855-5875 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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