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Corporate Lobbying and Fraud Detection

Published online by Cambridge University Press:  06 June 2011

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

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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 6 , December 2011 , pp. 1865 - 1891
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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