Hostname: page-component-76fb5796d-45l2p Total loading time: 0 Render date: 2024-04-25T07:01:20.370Z Has data issue: false hasContentIssue false
  • English
  • Français

Does Political Corruption Impede Firm Innovation? Evidence from the United States

Published online by Cambridge University Press:  24 April 2020

Qianqian Huang Open the ORCID record for Qianqian Huang [Opens in a new window]  and
Tao Yuan
Qianqian Huang
Affiliation:
Huang, qiahuang@cityu.edu.hk, City University of Hong Kong College of Business
Tao Yuan*
Affiliation:
Yuan, finyuan@nju.edu.cn, Nanjing University School of Business
*
Yuan (corresponding author), finyuan@nju.edu.cn
Get access Rights & Permissions [Opens in a new window]

Abstract

We examine how local political corruption affects firm innovation in the United States. We find that firms located in highly corrupt areas are less innovative as measured by their patenting activities. The results are robust to the inclusion of a broad set of regional characteristics, instrumental variable analysis, matching analysis, difference-in-differences test, and alternative proxies for local corruption. Further analysis shows that reduced innovation incentives due to high extortion risk and decreased threat of competition could be the possible economic channels through which corruption affects innovation. Overall, our results indicate that local political corruption impedes corporate innovation in the United States.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 1 , February 2021 , pp. 213 - 248
Copyright
© Michael G. Foster School of Business, University of Washington 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Jarrad Harford (the editor) and Krishnamurthy Subramanian (the referee) for their constructive comments. We also thank Thomas Chemmanur, Po-Hsuan Hsu, Gustav Martinsson, Yaxuan Qi, Xuan Tian, conference participants at the 2018 AFA Ph.D. poster session, the 2017 Entrepreneurial Finance Conference, and the 2017 Australasian Finance and Banking Conference, and seminar participants at City University of Hong Kong for helpful suggestions and comments. We gratefully acknowledge financial support from the City University of Hong Kong (Grant No. 7004989). All errors are ours.

References

Abadie, A., and Imbens, G. W.. “Bias-Corrected Matching Estimators for Average Treatment Effects.” Journal of Business & Economic Statistics, 29 (2011), 1–11.Google Scholar
Acharya, V.; Baghai, R.; and Subramanian, K.. “Labor Laws and Innovation.” Journal of Law and Economics, 56 (2013), 997–1037.Google Scholar
Acharya, V.; Baghai, R.; and Subramanian, K.. “Wrongful Discharge Laws and Innovation.” Review of Financial Studies, 27 (2014), 301–346.Google Scholar
Acharya, V., and Subramanian, K.. “Bankruptcy Codes and Innovation.” Review of Financial Studies, 22 (2009), 4949–4988.Google Scholar
Aghion, P.; Bloom, N.; Blundell, R.; Griffith, R.; and Howitt, P.. “Competition and Innovation: An Inverted-U Relationship.” Quarterly Journal of Economics, 120 (2005), 701–728.Google Scholar
Aghion, P.; Van Reenen, J.; and Zingales, L.. “Innovation and Institutional Ownership.” American Economic Review, 103 (2013), 277–304.Google Scholar
Akey, P.“Valuing Changes in Political Networks: Evidence from Campaign Contributions to Close Congressional Elections.” Review of Financial Studies, 28 (2015), 3188–3223.Google Scholar
Alt, J. E., and Lassen, D. D.. “The Political Economy of Institutions and Corruption in American States.” Journal of Theoretical Politics, 15 (2003), 341–365.Google Scholar
Anokhin, S., and Schulze, W.. “Entrepreneurship, Innovation, and Corruption.” Journal of Business Venturing, 24 (2009), 465–476.Google Scholar
Athanasouli, D., and Goujard, A.. “Corruption and Management Practices: Firm Level Evidence.” Journal of Comparative Economics, 43 (2015), 1014–1034.Google Scholar
Ayyagari, M.; Demirgüç-Kunt, A.; and Maksimovic, V.. “Firm Innovation in Emerging Markets: The Role of Finance, Governance, and Competition.” Journal of Financial and Quantitative Analysis, 46 (2011), 1545–1580.Google Scholar
Ayyagari, M.; Demirgüç-Kunt, A.; and Maksimovic, V.. “Bribe Payments and Innovation in Developing Countries: Are Innovating Firms Disproportionately Affected? ” Journal of Financial and Quantitative Analysis, 49 (2014), 51–75.Google Scholar
Bai, J.; Jayachandran, S.; Malesky, E.; and Olken, B.. “Firm Growth and Corruption: Empirical Evidence from Vietnam.” The Economic Journal, 129 (2019), 651–677.Google Scholar
Bhattacharya, U.; Hsu, P.; Tian, X.; and Xu, Y.. “What Affects Innovation More: Policy or Policy Uncertainty? ” Journal of Financial and Quantitative Analysis, 52 (2017), 1869–1901.Google Scholar
Blau, B. M.; Brough, T. J.; and Thomas, D. W.. “Corporate Lobbying, Political Connections, and the Bailout of Banks.” Journal of Banking and Finance, 37 (2013), 3007–3017.Google Scholar
Borisov, A.; Goldman, E.; and Gupta, N.. “The Corporate Value of (Corrupt) Lobbying.” Review of Financial Studies, 29 (2015), 1039–1071.Google Scholar
Boylan, R., and Long, C.. “Measuring Public Corruption in the American States: A Survey of State House Reporters.” State Politics & Policy Quarterly, 3 (2003), 420–438.Google Scholar
Brown, J.; Martinsson, G.; and Petersen, B.. “Law, Stock Markets, and Innovation.” Journal of Finance, 68 (2013), 1517–1549.Google Scholar
Butler, A.; Fauver, L.; and Mortal, S.. “Corruption, Political Connections, and Municipal Finance.” Review of Financial Studies, 22 (2009), 2873–2905.Google Scholar
Campante, F., and Do, Q.. “Isolated Capital Cities, Accountability, and Corruption: Evidence from US States.” American Economic Review, 104 (2014), 2456–2481.Google Scholar
Cerqueiro, G.; Hegde, D.; Penas, M. F.; and Seamans, R. C.. “Debtor Rights, Credit Supply, and Innovation.” Management Science, 63 (2017), 3311–3327.Google Scholar
Cheung, S.; Rau, P.; and Stouraitis, A.. “How Much Do Firm’s Pay as Bribes and What Benefits Do They Get? Evidence from Corruption Cases Worldwide.” NBER Working Paper No. 17981, National Bureau of Economic Research (2012).Google Scholar
Cohen, L., and Malloy, C.. “Mini West Virginias: Corporations as Government Dependents.” Working Paper, Harvard Business School (2016).Google Scholar
Cooper, M. J.; Gulen, H.; and Ovtchinnikov, A. V.. “Corporate Political Contributions and Stock Returns.” Journal of Finance, 65 (2010), 687–724.Google Scholar
Cordis, A. S.“Corruption and the Composition of Public Spending in the United States.” Public Finance Review, 42 (2014), 745–773.Google Scholar
Cordis, A. S., and Milyo, J.. “Measuring Public Corruption in the United States: Evidence from Administrative Records of Federal Prosecutions.” Public Integrity, 18 (2016), 127–148.Google Scholar
Cordis, A. S., and Warren, P.. “Sunshine as Disinfectant: The Effect of State Freedom of Information Act Laws on Public Corruption.” Journal of Public Economics, 115 (2014), 18–36.Google Scholar
Dal Bó, E., and Rossi, M. A.. “Corruption and Inefficiency: Theory and Evidence from Electric Utilities.” Journal of Public Economics, 91 (2007), 939–962.Google Scholar
Dass, N.; Nanda, V.; and Xiao, S. C.. “Public Corruption in the United States: Implications for Local Firms.” Review of Corporate Finance Studies, 5 (2016), 102–138.Google Scholar
Duchin, R., and Sosyura, D.. “The Politics of Government Investment.” Journal of Financial Economics, 106 (2012), 24–48.Google Scholar
Dutta, S.; Lanvin, B.; and Wunsch-Vincent, S.. The Global Innovation Index 2018: Energizing the World with Innovation. Geneva, Ithaca, and Fontainebleau: Cornell University, INSEAD, and World Intellectual Property Organization (2018).Google Scholar
Egger, P., and Winner, H.. “Evidence on Corruption as An Incentive for Foreign Direct Investment.” European Journal of Political Economy, 21 (2005), 932–952.Google Scholar
Faccio, M.“Politically Connected Firms.” American Economic Review, 96 (2006), 369–386.Google Scholar
Faccio, M.; Masulis, R.; and McConnell, J.. “Political Connections and Corporate Bailouts.” Journal of Finance, 61 (2006), 2597–2635.Google Scholar
Fang, L.; Lerner, J.; and Wu, C.. “Intellectual Property Rights Protection, Ownership, and Innovation: Evidence from China.” Review of Financial Studies, 30 (2017), 2446–2477.Google Scholar
Fang, V.; Tian, X.; and Tice, S.. “Does Stock Liquidity Enhance or Impede Firm Innovation? ” Journal of Finance, 69 (2014), 2085–2125.Google Scholar
Fisman, R.“Estimating the Value of Political Connections.” American Economic Review, 91 (2001), 1095–1102.Google Scholar
Fisman, R., and Golden, M.. Corruption: What Everyone Needs to Know. New York, NY: Oxford University Press (2017).Google Scholar
García, D., and Norli, Ø.. “Geographic Dispersion and Stock Returns.” Journal of Financial Economics, 106 (2012), 547–565.Google Scholar
Glaeser, E.; Kallal, H.; Scheinkman, J.; and Shleifer, A.. “Growth of Cities.” Journal of Political Economy, 100 (1992), 1126–1152.Google Scholar
Glaeser, E., and Saks, R.. “Corruption in America.” Journal of Public Economics, 90 (2006), 1053–1072.Google Scholar
Globerman, S., and Shapiro, D.. “Governance Infrastructure and US Foreign Direct Investment.” Journal of International Business Studies, 34 (2003), 19–39.Google Scholar
Goldman, E.; Rocholl, J.; and So, J.. “Politically Connected Boards Affect Firm Value? ” Review of Financial Studies, 22 (2009), 2331–2360.Google Scholar
Goldman, E.; Rocholl, J.; and So, J.. “Politically Connected Boards of Directors and the Allocation of Procurement Contracts.” Review of Finance, 17 (2013), 1617–1648.Google Scholar
Gormley, T. A., and Matsa, D. A.. “Common Errors: How to (and not to) Control for Unobserved Heterogeneity.” Review of Financial Studies, 27 (2014), 617–661.Google Scholar
Graham, J., and Mills, L.. “Simulating Marginal Tax Rates Using Tax Return Data.” Journal of Accounting and Economics, 46 (2008), 366–388.Google Scholar
Griliches, Z., and Hausman, J. A.. “Errors in Variables in Panel Data.” Journal of Econometrics, 31 (1986), 93–118.Google Scholar
Hall, B.; Helmers, C.; Rogers, M.; and Sena, V.. “The Choice between Formal and Informal Intellectual Property: A Review.” Journal of Economic Literature, 52 (2014), 375–423.Google Scholar
Hall, B.; Jaffe, A.; and Trajtenberg, M.. “The NBER Patent Citation Data File: Lessons, Insights and Methodological Tools.” NBER Working Paper, National Bureau of Economic Research (2001).Google Scholar
Hall, B.; Jaffe, A.; and Trajtenberg, M.. “Market Value and Patent Citations.” RAND Journal of Economics, 36 (2005), 16–38.Google Scholar
Hasan, I.; Hoi, C. K.; Wu, Q.; and Zhang, H.. “Social Capital and Debt Contracting: Evidence from Bank Loans and Public Bonds.” Journal of Financial and Quantitative Analysis, 52 (2017), 1017–1047.Google Scholar
He, J., and Tian, X.. “The Dark Side of Analyst Coverage: The Case of Innovation.” Journal of Financial Economics, 109 (2013), 856–878.Google Scholar
He, J., and Tian, X.. “Finance and Corporate Innovation: A Survey.” Asia-Pacific Journal of Financial Studies, 47 (2018), 165–212.Google Scholar
Hirshleifer, D.; Hsu, P.; and Li, D.. “Innovative Efficiency and Stock Returns.” Journal of Financial Economics, 107 (2013), 632–654.Google Scholar
Hsu, P.; Tian, X.; and Xu, Y.. “Financial Development and Innovation: Cross-Country Evidence.” Journal of Financial Economics, 112 (2014), 116–135.Google Scholar
Huntington, S. P.Political Order in Changing Societies. New Haven, CT: Yale University Press (1968).Google Scholar
Jain, A.“Corruption: A Review.” Journal of Economic Surveys, 15 (2001), 71–121.Google Scholar
Johnson, N. D.; LaFountain, C. L.; and Yamarik, S.. “Corruption Is Bad for Growth (Even in the United States).” Public Choice, 147 (2011), 377–393.Google Scholar
Kang, K.“Policy Influence and Private Returns from Lobbying in the Energy Sector.” Review of Economics Studies, 83 (2016), 269–305.Google Scholar
Kaplan, S., and Zingales, L.. “Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints? ” Quarterly Journal of Economics, 112 (1997), 169–215.Google Scholar
Khwaja, A. I., and Mian, A.. “Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market.” Quarterly Journal of Economics, 120 (2005), 1371–1411.Google Scholar
Kim, T. “Does a Firm’s Political Capital Affect Its Investment and Innovation?” Working Paper, University of Notre Dame (2018).Google Scholar
Kogan, L.; Papanikolaou, D.; Seru, A.; and Stoffman, N.. “Technological Innovation, Resource Allocation, and Growth.” Quarterly Journal of Economics, 132 (2017), 665–712.Google Scholar
Koh, P., and Reed, D.. “Missing R&D.” Journal of Accounting and Economics, 60 (2015), 73–94.Google Scholar
Lee, N. “Migrant and Ethnic Diversity, Cities and Innovation: Firm Effects or City Effects? ” Journal of Economic Geography, 15 (2014), 769–796.Google Scholar
Leff, N. “Economic Development through Bureaucratic Corruption.” American Behavioral Scientist, 8 (1964), 8–14.Google Scholar
Lerner, J. “The Empirical Impact of Intellectual Property Rights on Innovation: Puzzles and Clues.” American Economic Review, 99 (2009), 343–348.Google Scholar
Lerner, J., and Seru, A.. “The Use and Misuse of Patent Data: Issues for Corporate Finance and Beyond.” Working Paper, Harvard Business School (2015).Google Scholar
Leys, C.“What Is the Problem about Corruption? ” Journal of Modern African Studies, 3 (1965), 215–230.Google Scholar
Liu, C., and Mikesell, J. L.. “The Impact of Public Officials’ Corruption on the Size and Allocation of U.S. State Spending.” Public Administration Review, 74 (2014), 346–359.Google Scholar
Lui, F. T.“An Equilibrium Queuing Model of Bribery.” Journal of Political Economy, 93 (1985), 760–781.Google Scholar
Mauro, P.“Corruption and Growth.” Quarterly Journal of Economics, 110 (1995), 681–712.Google Scholar
Mironov, M.“Should One Hire a Corrupt CEO in a Corrupt Country? ” Journal of Financial Economics, 117 (2015), 29–42.Google Scholar
Mukherjee, A.; Singh, M.; and Žaldokas, A.. “Corporate Taxes Hinder Innovation? ” Journal of Financial Economics, 124 (2017), 195–221.Google Scholar
Murphy, K.; Shleifer, A.; and Vishny, R.. “The Allocation of Talent: Implications for Growth.” Quarterly Journal of Economics, 106 (1991), 503–530.Google Scholar
Murphy, K.; Shleifer, A.; and Vishny, R.. “Why Is Rent-Seeking So Costly to Growth? ” American Economic Review, 83 (1993), 409–414.Google Scholar
Nanda, R., and Rhodes-Kropf, M.. “Investment Cycles and Startup Innovation.” Journal of Financial Economics, 110 (2013), 403–418.Google Scholar
Nathan, M., and Lee, N.. “Cultural Diversity, Innovation, and Entrepreneurship: Firm-Level Evidence from London.” Economic Geography, 89 (2013), 367–394.Google Scholar
Parrotta, P.; Pozzoli, D.; and Pytlikova, M.. “The Nexus between Labor Diversity and Firm’s Innovation.” Journal of Population Economics, 27 (2014), 303–364.Google Scholar
Paunov, C.“Corruption’s Asymmetric Impacts on Firm Innovation.” Journal of Development Economics, 118 (2016), 216–231.Google Scholar
Romer, P.“Endogenous Technological Change.” Journal of Political Economy, 98 (1990), S71–S102.Google Scholar
Rose-Ackerman, S.“The Economics of Corruption.” Journal of Public Economics, 4 (1975), 187–203.Google Scholar
Sapra, H.; Subramanian, A.; and Subramanian, K. V.. “Corporate Governance and Innovation: Theory and Evidence.” Journal of Financial and Quantitative Analysis, 49 (2014), 957–1003.Google Scholar
Shleifer, A., and Vishny, R.. “Corruption.” Quarterly Journal of Economics, 108 (1993), 599–617.Google Scholar
Smith, J.“US Political Corruption and Firm Financial Policies.” Journal of Financial Economics, 121 (2016), 350–367.Google Scholar
Solow, R.“Technical Change and the Aggregate Production Function.” Review of Economics and Statistics, 39 (1957), 312–320.Google Scholar
Stulz, R.“The Limits of Financial Globalization.” Journal of Finance, 60 (2005), 1595–1638.Google Scholar
Tarr, G. A.Understanding State Constitutions. Princeton, NJ: Princeton University Press (2000).Google Scholar
Tirole, J.“A Theory of Collective Reputations (with Applications to the Persistence of Corruption and to Firm Quality).” Review of Economic Studies, 63 (1996), 1–22.Google Scholar
Vial, V., and Hanoteau, J.. “Corruption, Manufacturing Plant Growth and the Asian Paradox: Indonesian Evidence.” World Development, 38 (2010), 693–705.Google Scholar
Wei, S.“Corruption in Economic Development: Beneficial Grease, Minor Annoyance, or Major Obstacle?” World Bank Policy Research Working Paper, Washington, DC (1999).Google Scholar
Williams, H. L.“Intellectual Property Rights and Innovation: Evidence from the Human Genome.” Journal of Political Economy, 121 (2013), 1–27.Google Scholar
Yu, F., and Yu, X.. “Corporate Lobbying and Fraud Detection.” Journal of Financial and Quantitative Analysis, 46 (2011), 1865–1891.Google Scholar
Zeume, S.“Bribes and Firm Value.” Review of Financial Studies, 30 (2017), 1457–1489.Google Scholar
Supplementary material: File

Huang and Yuan Supplementary Materials

Huang and Yuan Supplementary Materials

Download Huang and Yuan Supplementary Materials(File)
File 124.3 KB