60 Pages Posted: 2 Jan 2007 Last revised: 12 Sep 2016
Date Written: June 9, 2010
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: 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