Hostname: page-component-7479d7b7d-m9pkr Total loading time: 0 Render date: 2024-07-15T00:34:55.098Z Has data issue: false hasContentIssue false

Corporate Lobbying and Fraud Detection

Published online by Cambridge University Press:  06 June 2011

Frank Yu
China Europe International Business School, 699 Hongfeng Road, Pudong, Shanghai 201206, China.
Xiaoyun Yu
Kelley School of Business, Indiana University, 1309 E. 10th St., Bloomington, IN 47405, and Shanghai Jiaotong University.


This paper examines the relation between corporate lobbying and fraud detection. Using data on corporate lobbying expenses between 1998 and 2004, and a sample of large frauds detected during the same period, we find that firms’ lobbying activities make a significant difference in fraud detection: Compared to nonlobbying firms, on average, firms that lobby have a significantly lower hazard rate of being detected for fraud, evade fraud detection 117 days longer, and are 38% less likely to be detected by regulators. In addition, fraudulent firms on average spend 77% more on lobbying than nonfraudulent firms, and they spend 29% more on lobbying during their fraudulent periods than during nonfraudulent periods. The delay in detection leads to a greater distortion in resource allocation during fraudulent periods. It also allows managers to sell more of their shares.

Research Articles
Copyright © Michael G. Foster School of Business, University of Washington 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)


Aggarwal, R.; Meschke, F.; and Wang, T.. “Corporate Political Contributions: Investment or Agency?” Working Paper, University of Minnesota (2009).Google Scholar
Agrawal, A., and Chadha, S.. “Corporate Governance and Accounting Scandals.” Journal of Law and Economics, 48 (2005), 371406.CrossRefGoogle Scholar
Agrawal, A., and Knoeber, C. R.. “Do Some Outside Directors Play a Political Role?Journal of Law and Economics, 44 (2001), 179198.CrossRefGoogle Scholar
Baron, D. P. “Review of Grossman and Helpman’s Special Interest Politics.” Journal of Economic Literature, 40 (2002), 12211229.Google Scholar
Beasley, M. S. “An Empirical Analysis of the Relation between the Board of Director Composition and Financial Statement Fraud.” Accounting Review, 71 (1996), 443465.Google Scholar
Burns, N., and Kedia, S.. “The Impact of Performance-Based Compensation on Misreporting.” Journal of Financial Economics, 79 (2006), 3567.CrossRefGoogle Scholar
Claessens, S.; Feijen, E.; and Laeven, L.. “Political Connections and Preferential Access to Finance: The Role of Campaign Contributions.” Journal of Financial Economics, 88 (2008), 554580.CrossRefGoogle Scholar
Cooper, M. J.; Gulen, H.; and Ovtchinnikov, A. V.. “Corporate Political Contributions and Stock Returns.” Journal of Finance, 65 (2010), 687724.CrossRefGoogle Scholar
Dechow, P. M.; Sloan, R. G.; and Sweeney, A. P.. “Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC.” Contemporary Accounting Research, 13 (1996), 136.CrossRefGoogle Scholar
Dyck, A.; Morse, A.; and Zingales, L.. “Who Blows the Whistle on Corporate Fraud?Journal of Finance, 65 (2010), 22132253.CrossRefGoogle Scholar
Efendi, J.; Srivastava, A.; and Swanson, E. P.. “Why Do Corporate Managers Misstate Financial Statements? The Role of Option Compensation and Other Factors.” Journal of Financial Economics, 85 (2007), 667708.CrossRefGoogle Scholar
Faccio, M.; Masulis, R. W.; and McConnell, J. J.. “Political Connections and Corporate Bailouts.” Journal of Finance, 61 (2006), 25972635.CrossRefGoogle Scholar
Faccio, M., and Parsley, D. C.. “Sudden Deaths: Taking Stock of Geographic Ties.” Journal of Financial and Quantitative Analysis, 44 (2009), 683718.CrossRefGoogle Scholar
Fan, J. P. H.; Wong, T. J.; and Zhang, T.. “Politically Connected CEOs, Corporate Governance and Post-IPO Performance of China’s Partially Privatized Firms.” Journal of Financial Economics, 84 (2007), 330357.CrossRefGoogle Scholar
Fisman, R.Estimating the Value of Political Connections.” American Economic Review, 91 (2001), 10951102.CrossRefGoogle Scholar
Francis, J. R. “What Do We Know about Audit Quality?British Accounting Review, 34 (2004), 345368.CrossRefGoogle Scholar
Gande, A., and Lewis, C. M.. “Shareholder-Initiated Class Action Lawsuits: Shareholder Wealth Effects and Industry Spillovers.” Journal of Financial and Quantitative Analysis, 44 (2009), 823850.CrossRefGoogle Scholar
Goldman, E.; Peyer, U.; and Stefanescu, I.. “Financial Misrepresentation and Its Impact on Rivals.” Financial Management, forthcoming (2011).Google Scholar
Gupta, S., and Swenson, C. W.. “Rent Seeking by Agents of the Firm.” Journal of Law and Economics, 46 (2003), 253268.CrossRefGoogle Scholar
Jayachandran, S.The Jeffords Effect.” Journal of Law and Economics, 49 (2006), 397425.CrossRefGoogle Scholar
Johnson, S., and Mitton, T.. “Cronyism and Capital Controls: Evidence from Malaysia.” Journal of Financial Economics, 67 (2003), 351382.CrossRefGoogle Scholar
Johnson, S. A.; Ryan, H. E. Jr.; and Tian, Y. S.. “Managerial Incentives and Corporate Fraud: the Sources of Incentives Matter.” Review of Finance, 13 (2009), 115145.CrossRefGoogle Scholar
Karpoff, J. M.; Lee, D. S.; and Martin, G. S.. “The Costs to Firms of Cooking the Books.” Journal of Financial and Quantitative Analysis, 43 (2008), 581612.CrossRefGoogle Scholar
Karpoff, J. M.; Lee, D. S.; and Vendrzyk, V. P.. “Defense Procurement Fraud, Penalties, and Contractor Influence.” Journal of Political Economy, 107 (1999), 809842.CrossRefGoogle Scholar
Kedia, S., and Philippon, T.. “The Economics of Fraudulent Accounting.” Review of Financial Studies, 22 (2009), 21692199.CrossRefGoogle Scholar
Khwaja, A. I., and Mian, A.. “Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market.” Quarterly Journal of Economics, 120 (2005), 13711411.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R.. “Investor Protection and Corporate Governance.” Journal of Financial Economics, 58 (2000), 327.CrossRefGoogle Scholar
Milyo, J.; Primo, D.; and Groseclose, T.. “Corporate PAC Campaign Contributions in Perspective.” Business and Politics, 2 (2000), 7588.CrossRefGoogle Scholar
Palmrose, Z.-V., and Scholz, S.. “The Circumstances and Legal Consequences of Non-GAAP Reporting: Evidence from Restatements.” Contemporary Accounting Research, 21 (2004), 139180.CrossRefGoogle Scholar
Peng, L., and Röell, A.. “Executive Pay and Shareholder Litigation.” Review of Finance, 12 (2008), 141184.CrossRefGoogle Scholar
Roberts, B. E. “A Dead Senator Tells No Lies: Seniority and the Distribution of Federal Benefits.” American Journal of Political Science, 38 (1990), 3158.CrossRefGoogle Scholar
Wang, T.Investment, Shareholder Monitoring and the Economics of Corporate Securities Fraud.” Working Paper, University of Minnesota (2009).Google Scholar
Wang, T. Y.; Winton, A.; and Yu, X.. “Corporate Fraud and Business Conditions: Evidence from IPOs.” Journal of Finance, 65 (2010), 22552292.CrossRefGoogle Scholar
Wright, J. R. “PACs, Contributions, and Roll Calls: An Organizational Perspective.” American Political Science Review, 79 (1985), 400414.CrossRefGoogle Scholar
Yu, F.Analyst Coverage and Earnings Management.” Journal of Financial Economics, 88 (2008), 245271.CrossRefGoogle Scholar