The Culture of Corruption and the Value of Corporate Governance

Abstract

U.S. corporations headquartered in states with greater public corruption are prone to more unethical behavior, reflective of a state-level "culture-of-corruption". We test for state-level differences by exploiting passage of Foreign Corrupt Practices Act (FCPA) that curtailed bribery of foreign officials. Firms in corrupt states, especially firms trading with more corrupt countries, suffer greater value (Tobin's Q) and performance (ROA) decline following FCPA, indicating larger losses from restrictions on bribery. Culture-of-corruption is also manifest in greater agency problems: Firms in corrupt states are more likely to manage earnings, face securities fraud litigation and be adversely affected by state-level anti-takeover laws.