Essays on the Consequences of an Exogenous Decline in Corporate Political Connectedness: Evidence from Laws Modeled on the American Anti-Corruption Act


Student thesis: Doctoral Thesis

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Award date22 May 2019


To curb the influence of money in politics, a number of townships, cities, counties, and states across the U.S. have recently passed measures, resolutions, ordinances, and laws modeled on the American Anti-Corruption Act, which aims to: (1) “make it illegal to purchase political influence,” and (2) “end secret money” ( These locally adopted AACA-based laws sought to, inter alia, ban gifts from lobbyists, prohibit campaign contributions from industries that politicians regulate, lower campaign donation thresholds, require disclosure of the true funders of political ads, and constrain gerrymandering. These laws also stipulate penalties (e.g., publication of list of noncompliant firms for a period of one year or more, a subsequent two-year ban for noncompliant firms, a ten [twenty]-year prison sentence for firms [politicians] implicated in political bribery cases), as well as employ crime detection tactics (e.g., wiretapping in investigations that also extend to self-dealing by politicians). 

These legislative changes impose significant costs on politically connected firms (hereafter, “PC firms”) that more than offset potential gains from affiliations with politicians. Ultimately, this discourages firms from establishing or maintaining connections with government representatives, thus suggesting that, in terms of impact, AACA-based promulgations compel an exogenous decline in political connections (hereafter, “PC”). 

I exploit these novel staggered events—occurring between 2014 (the first year of adoption) and 2017—as plausibly exogenous negative shocks to PC. For the 2010-2018 quarterly reporting period, I utilize this setting to provide new causal evidence on the effect of PC on certain key corporate decision areas, which are essentially financial and real decisions. The specific decision areas, which I focus on are financial reporting quality (chapter 1), corporate investment (chapter 2), and corporate risk-taking (chapter 3).

The first essay (i.e., chapter I) investigates how an exogenous decline in PC affects financial reporting quality (proxied by accruals manipulation). Using a difference-in-differences (hereafter, “DID”) estimation, I find that, relative to firms in non-adopting locations (i.e., control firms), firms headquartered in adopting locations (i.e., treated firms) have significantly higher accounting quality and are less likely to: (1) use income-increasing discretionary accruals to meet/beat analyst earnings forecasts, and (2) meet/beat analyst earnings targets by up to one cent. I also find that the stock market responds favorably to this ex-post improvement in accounting quality, which also culminates in stock prices better capturing information about future earnings and cash flows. Overall, the evidence suggests that local anti-corruption laws discipline opportunistic reporting and enhance earnings informativeness.

The second essay examines the impact of an exogenous decline in PC on investment. Results from a DID estimation reveal a decline in the level of investment for treated firms. Because corporate investment is determined by managers’ choices—which could be either optimal or suboptimal, I further look into managerial efficiency in the investment decision-making process and find a reduction in both over- and under-investment for treated firms. These findings suggest that anti-corruption laws discipline managerial tendencies to: (1) pursue empire building incentives; and (2) pass up potential value-enhancing investments.

The last essay examines whether these AACA-based laws affect corporate risk-taking, which I capture as the uncertainties in cash flows from investment projects. Results from a DID estimation reveal that, relative to control firms, treatment firms are less likely to make riskier choices in investment decisions. This finding is robust to the use of research and development (R&D) expenditure as an alternative proxy for corporate risk-taking. Overall, this evidence suggests that AACA-based laws discipline managerial risk-taking tendencies.