Board Political Connections and Financial Fraud: The Case of Business Groups in South Korea

Abstract

Are firms more likely to commit financial fraud when they are politically connected? Despite scholarly efforts to disentangle the roots of financial fraud, we know little about how firm’s commission of fraud is related to its political environment in which it operates. Using South Korean business groups as our research context, we take a novel approach by looking at business-government relationships through the lens of the social exchange perspective. Using the unique dataset of South Korean business groups, we find that firms affiliated with business groups are less likely to engage in financial fraud when they are politically connected, particularly when the ruling government is business group friendly. We additionally examine whether the above-mentioned relationships are moderated by the extent of family control on firms. Consistent with our hypothesis, we find that family control heightens the likelihood of fraud when the board is politically connected under a business group friendly government.