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 alternativ...

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Bibliographic Details
Published in:Journal of financial economics 2016-08, Vol.121 (2), p.350-367
Main Author: Smith, Jared D.
Format: Article
Language:English
Subjects:
Cash holdings
Cash management
Corporate headquarters
Corruption
Corruption in government
Expropriation
Financial policy
Leverage
Liquidity
Local corruption
Rent-seeking
Studies
United States
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Summary: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.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2015.08.021