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Negation of Sanctions: The Personal Effect of Political Contributions

Published online by Cambridge University Press:  09 September 2022

Sarah Fulmer ,
April Knill  and
Xiaoyun Yu Open the ORCID record for Xiaoyun Yu [Opens in a new window]
Sarah Fulmer
Affiliation:
Department of Accounting, University of Tampa sfulmer@ut.edu
April Knill
Affiliation:
Department of Finance, Florida State University aknill@cob.fsu.edu
Xiaoyun Yu*
Affiliation:
Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University Shanghai Advanced Institute of Finance and ECGI
*
xyyu@saif.sjtu.edu.cn (corresponding author)
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Abstract

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We show that political contributions are associated with reduced civil and criminal sanctions for fraudulent executives. These managers benefit more from contributions if their firm also gained from the fraud, if they occupy top positions in firms with weak boards, or if they contribute to powerful politicians. Political contributions reduce budgetary resources for government enforcers and lengthen the Securities and Exchange Commission’s case time-to-resolution. They also facilitate penalty transfer from fraudulent managers to the firm, resulting in their entrenchment and long-term destruction of shareholder value. Our findings highlight an agency cost of political contributions and a mechanism undermining the disciplining effect of regulations.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 7 , November 2023 , pp. 2783 - 2819
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

This article is previously titled “Political Contributions and the Severity of Government Enforcement.” We appreciate helpful comments of an anonymous referee, Cindy Alexander (discussant), Stephen Bainbridge, Craig Brown, Chen Chen (discussant), Doug Cumming, Viktoria Dalko, Mara Faccio, Joseph Fan, Jasmin Gider (discussant), Todd Gormley (discussant), Michael Holmes, David Humphrey, Irena Hutton, Danling Jiang, Jonathan Karpoff, Simi Kedia, Michael King, D. Scott Lee, Tim Loughran, Paul Malatesta (the editor), Todd Milbourn, Alexei Ovtchinnikov, Paul Schultz, Ed Walker, Frank Yu, Alminas Žaldokas (discussant), and participants at the 2014 American Accounting Association annual meeting, 2013 American Finance Association annual meeting, 2012 CFA-FAJ-Schulich Conference on Fraud, Ethics, and Regulation, 2014 China International Conference in Finance, 2012 Financial Management Association annual meeting, Chinese University of Hong Kong, Florida State University, Hong Kong University, Nanyang Technological University, National University of Singapore, Northern Finance Association annual meeting, University of Notre Dame, North Carolina State University, Wake Forest University, Miami University of Ohio, Lehigh University, and University of North Carolina at Charlotte. We thank Alexei Ovtchinnikov for his generous sharing of PAC contributions data, Nicholas Korsakov for data sourcing and conversion, and Matt Pierson and Corey Luttrell for research assistance.

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