Local Political Corruption Research Articles

Perceptions of Local Political Corruption

In this paper, we explore the roots of perceptions of local corruption in U.S. cities, using survey data collected from 39 cities during 40 different mayoral election campaigns. We examine the impact of the city-level corruption context alongside measures of political information, partisan and racial/ethnic representation in local government, evaluations of personal and policy satisfaction, and other individual-level attitudinal and demographic characteristics. We find that perceptions of local corruption are responsive to the local corruption context—though this relationship is heavily conditioned by political knowledge—satisfaction with local conditions, other attitudinal measures, and, to a lesser extent, co-ethnic representation in local government.

Bribes and Bombs: The Effect of Corruption on Terrorism

We leverage plausibly exogenous variation in regional exposure to corruption to provide causal estimates of the impact of local political corruption on terrorist activity for a sample of 175 countries between 1970 and 2018. We find that higher levels of corruption lead to more terrorism. This result is robust to a variety of empirical modifications, including various ways in which we probe the validity of our instrumental variables approach. We also show that corruption adversely affects the provision of public goods and undermines counter-terrorism capacity. Thus, our empirical findings are consistent with predictions from a game-theoretical representation of terrorism, according to which corruption makes terrorism relatively more attractive compared to peaceful contestation, while also decreasing the costs of organizing and carrying out terrorist attacks.

Political Corruption and Accounting Conservatism

We investigate how local political corruption shapes corporate financial reporting conservatism. Using a large sample of U.S. public firms, we find that firms located in areas with higher levels of political corruption tend to adopt greater accounting conservatism. We also find that firms in more corrupt areas bear greater political expropriation costs. Further analysis reveals that the positive effect of corruption on conservatism is stronger for firms with less bargaining power against corrupt officials, firms with lower public visibility, and firms with weaker dependence on the government for sales. Overall, our findings support the expropriation hypothesis that corrupt officials have incentives to expropriate resources from local firms, which induces them to adopt more conservative reporting strategies to shield their assets.

Political uncertainty, corruption, and corporate cash holdings

Exposure to political corruption and political uncertainty separately demands opposing risk management responses: to reduce cash to minimize expropriation and to increase cash to hedge policy risk. We study how local political corruption and political uncertainty interact in their impact on corporate cash holdings within the United States. We find robust evidence that firms located in states with higher corruption scores react to increases in local political uncertainty by increasing cash holdings more than those in less corrupt settings. This behavior suggests that firms in more corrupt settings find it expedient to raise cash to facilitate influence of officials in the face of local political risk. We find further support for this conclusion by showing that politically engaged firms respond to our measure of political risk by increasing cash and increasing spending on campaign contributions. Our findings point to a potential channel through which different jurisdictions experience the entrenchment and persistence of corruption.

Partisan alignment and political corruption: Evidence from a new democracy

I analyze the link between partisan alignment of local politicians and the incidence of political corruption, using novel hand-collected data on local political corruption in Ghana. The empirical analysis, based on 205 districts observed over the period 2013–2018, suggests significantly lower levels of political corruption in aligned districts. Partisan alignment reduces corruption by 1.9 percentage points, equivalent to about half of the mean-level in non-aligned districts. In line with political ambition theory, I attribute this result to local politicians aligned with the national government having incentives to control fiscal irregularities within their localities in order to appease their national party leaders and preserve their party’s reputation. Alternative explanations are considered through empirical means and can be excluded. The estimated effect is more pronounced in districts that (i) are party strongholds, (ii) have better financial endowments, and (iii) have female local parliamentarians. It appears that political centralization and a politicized bureaucracy, as observed in Ghana, are important explanations for this finding.

Local political corruption and Firm's non-GAAP reporting

We examine whether local political corruption affects managers' discretionary disclosures of non-GAAP earnings. Using United States Department of Justice data on the number of corruption convictions of government officials, we find that firms headquartered in more corrupt districts (1) are less likely to report non-GAAP earnings, (2) have less aggressive non-GAAP earnings disclosures, and (3) experience a significant decline in the exclusion magnitudes of non-GAAP earnings. These results are more pronounced for firms with concentrated operations in their headquarter states and are robust to controlling for demographic characteristics, employing alternative corruption and non-GAAP measures, using the instrumental variable approach, and conducting a difference-in-difference analysis based on firms' relocation. Finally, we show that as local political corruption increases, managers exclude lower levels of both recurring and non-recurring items when calculating non-GAAP earnings. Overall, the results suggest that managing non-GAAP reporting is one channel through which firms could deter rent-seeking by corrupt officials.

Local political corruption and M&As

We examine the relation between local political corruption and firms' cross-province M&As using provincial-level data on corruption in China. The results show that firms in more corrupt regions are less likely to engage in cross-province M&As. Further analyses reveal that the effects of local corruption on the probability of cross-province M&As are stronger when corrupt officers have greater impeding benefits or lower impeding costs. Meanwhile, Both ex-ante intervention and ex-post punishment are important channels through which corrupt officers hinder firms' cross-province M&As. Moreover, informal institutions, such as social capital and informal networks can help to alleviate the negative impact of political corruption on firms' cross-province M&As.Our findings show that in the context of highly government intervention, cross-province M&As not only cannot be an effective channel to shield from expropriation, but are themselves highly distorted and lead to significant economic efficiency losses.

Is R&D spending influenced by disinvestment and local political corruption? The case of Indian central public sector enterprises

The current study examines the effect of disinvestment (dilution of state ownership) and local political corruption on R&D spending in enterprises owned by the central government of India. Based on certain characteristic features of innovation as a strategy available to state-owned enterprises, I build two sets of hypotheses formalising the channels of how these variables may affect the possibility and amount of R&D. Data is drawn from multiple sources to compile a dataset that covers all manufacturing central government-owned enterprises in India over a period of ten years from 2007 to 2016. The study employs an instrumental variable technique to reduce the endogeneity between disinvestment and R&D decisions. We find that, while disinvestment and local political corruption have strong negative effects on whether a firm invests in R&D or not, it has no effect on the amount of R&D. In fact, the amount is driven by a host of firm-specific factors such as size, profit and proficiency of the share of skilled labor, managerial strength and non-unionisation of labor. We also find that the effects are strongly driven by the size of firms, special status awarded to firms and the ideology of the state where the enterprise operates.

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

AbstractWe 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.

How do US investors perceive the risk of local political corruption? Evidence from acquisition announcement

AbstractThis study examines the impact of local political corruption on investors’ evaluation of firms’ mergers and acquisitions (M&As) in the US. Using the number of corruption convictions of government officials reported by the US Department of Justice, we find that acquirers in more corrupt court districts experience lower acquirer announcement returns, lower combined acquirer and target announcement returns, and are less likely to complete acquisitions. We further find that the relation between local political corruption and acquirer announcement returns is worsened when acquirers operate primarily in the headquarters state. Overall, the results suggest that local political corruption has an adverse impact on investors’ evaluation of a firm’s M&A profitability.

Local Political Corruption and Financial Reporting Conservatism

We examine the relation between local political corruption and firms’ financial reporting conservatism using provincial-level data on corruption in China. The results show that firms in more corrupt regions report more conservatively. In other words, firms in the more corruption-prone regions are more likely to speed the recognition of bad news and slow the recognition of good news in their reported earnings. Similar results are obtained when we use the recent anti-corruption campaign in China as a quasi-natural experiment. Further analysis reveals that the effects of local corruption on reporting conservatism are weaker when firms are less subject to expropriation by corrupt officials. In summary, our findings imply that firms adopt conservative accounting to systematically understate their earnings and asset values, thereby curbing the expropriation of firm resources by corrupt officials.

Transparency and local government corruption: what does lack of transparency hide?

This paper empirically investigates the causal relationship between local government transparency and political corruption in a sample of Spain's 110 largest municipalities. After implementing a two-stage probit estimation procedure, our evidence indicates that transparency is inversely related to the likelihood of local political corruption. This result supports the hypothesis that a lack of transparency conceals corrupt activities and that an unwillingness to provide information is a good proxy of the likelihood of corruption.

Corruption, Dodd-Frank Whistleblowing, and Corporate Investment

We examine how local political corruption affects corporate investment. We find firms in corrupted states produce significantly less investment. The effect of political corruption on investment is more pronounced in firms with higher investment friction, higher political visibility, and poor governance. The results are robust to using alternative investment measures, alternative corruption measures, and different regression specifications. More importantly, we find that the deterrent effect of corruption on investment lessens after the Dodd-Frank Whistleblower Provision. These findings indicate corruption impedes corporate investment, but the better policy can help firms reduce the decline in firms’ investment located in corrupted states.

The effect of local political corruption on earnings quality

Our study examines whether political corruption of a local government at judicial district level influences earnings management activities of firms located in a corrupt area. Prior studies suggest that there is an association between political connections and earnings quality (e.g., Braam et al. in Int J Account 50: 111–141, 2015; Harymawan and Nowland in Int J Account Inf Manag 24: 339–356, 2016). Nevertheless, there is little research regarding the impact of local political corruption at judicial district level on financial reporting quality. Using a sample of publicly listed U.S. firms from 2007 to 2014, we find that firms located in corrupt regions are more likely to manage earnings through accruals management and real activities manipulation (i.e., sales manipulation and overproduction). An additional analysis indicates that firms located in corrupt regions have less earnings persistence and are more likely to use positive discretionary accruals to meet or beat the consensus analysts’ earnings forecast. Taken together, our study extends prior literature by addressing the concern regarding the influence of local political corruption on firms’ earnings quality.

Tourist municipalities and local political corruption

AbstractAre tourist municipalities a breeding ground for corruption? Before the 2008 economic crisis, Spain experienced an economic boom, together with a surge in political corruption at the local level. In a tourism‐oriented economy – tourism represents above 11% of country GDP – where most of the tourism activity is focused on certain municipalities, understanding the link between tourism and corruption at the local level is crucial. Whether those municipalities present differences from non‐tourist local governments when it comes to corruption represents the main research question of the present paper. Also, this paper analyzes whether voting behavior in these municipalities hides some particularities related to corrupt activities. This paper gathers information on municipalities' public accounts and fiscal revenues generated by businesses in the local area, together with the results of four local recent elections. Estimations show how tourism contributes to the existence of local political corruption. Interestingly, local governments in tourist municipalities are also proven to be more stable than those in non‐tourist municipalities.

Political Corruption and Firm Accounting Conservatism

We investigate how local political corruption shapes firms’ financial reporting conservatism in the United States. We find that firms located in more corrupt districts conduct higher level of conservative accounting as measured by Basu’s (1997) asymmetric timeliness coefficient. The results are robust to the inclusion of a broad set of firm and region characteristics, instrumental variable analysis, matching analysis, analysis for headquarter-relocated firms, and alternative proxies for local corruption and accounting conservatism. The positive effects of corruption on conservatism are accrued to firms with less bargaining power against the corrupt officials, firms less dependent on government for sales, firms with lower public visibility and firm-year observations in the pre-SOX period. Overall, our findings are consistent with an expropriation hypothesis that through adopting more conservative financial reporting policies, firms manage their earnings and net worth downward to shield their assets from corrupt officials’ expropriation.

Corruption and Corporate Innovation

Using US Department of Justice data on local corruption convictions, we examine the relation between local political corruption and private sector innovation. We find that political corruption has a substantial negative impact on the quality, quantity, and efficiency of firms’ innovation. This result is robust in the presence of a wide range of covariates, variable definitions, and econometric methods. To help establish causality, we use instrumental variable techniques to address potential endogeneity concerns, such as reverse causality and the endogenous nature of headquarter location decisions. Overall, the results suggest that political corruption acts as a barrier to innovation.

US political corruption and firm financial policies

Using US Department of Justice data on local political corruption, I find that firms in more corrupt areas hold less cash and have greater leverage than firms in less corrupt areas. The results are robust to including a range of controls and to using an instrumental variable approach, two alternative survey measures of corruption, and propensity score matching. Further, the association between corruption and leverage is largest among firms that operate primarily around their headquarters. Overall, the evidence is consistent with the hypothesis that firms manage liquidity downward and debt obligations upward to limit expropriation by corrupt local officials.

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

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 US.

Local Political Corruption: Potential structural malfunctions at the central–local, local–local and intra-local levels

Despite growing preoccupation on the part of both the public and researchers with the concept of political corruption and the ‘corruption eruption’ phenomenon, research studies addressing corruption in local government are few and far between. This exploratory research offers a theoretical conceptualization of institutionalized corruption in local government, and identifies structural factors that lead to such corruption. Further, this study empirically assesses institutional corruption at the local level and its correlation to attitudes and characteristics of local authorities and their populations, based on a survey of 1,709 residents of 156 local authorities in Israel and data on the local authorities from a separate database. This article proposes a model according to which local corruption arises from structural factors at three levels: the central–local level (relations between local authorities and the central government); the local–local level (competition between local authorities) and the intra-local level (factors relating to the performance of local councils and local democracy). Our analyses reveal correlations among characteristics of the local authority and community, residents' perceptions of local performance and perceptions of local corruption. Implications of the findings in light of strategies conventionally employed against corruption in local government are discussed.