U.S. Political Alignment and Corporate Fraud

Abstract

I investigate whether U.S. political geography has an impact on convictions for corporate fraud. Prior research shows that the degree of alignment between state politicians and the President’s political party is positively correlated with measures of earnings management for firms that are headquartered in the state. Typically, a high degree of political alignment affects a firm’s information and enforcement environment due to increases in policy risk and more lenient oversight, which are conducive to earnings management. I posit that such an environment is also conducive to corporate fraud and test this hypothesis using annual data for 2003-2017. The analysis is conducted using pooled OLS and panel regressions. I find that there is a positive and statistically significant relationship between corporate fraud conviction rates by state and a state-level measure of political alignment. This finding is robust to using alternative empirical specifications and ways of measuring fraud rates and political alignment.