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Corporate Lobbying and Fraud Detection

  • Frank Yu (a1) and Xiaoyun Yu (a2)

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.

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Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
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