Essays on corruption and corporate finance

The essays in my dissertation investigate how political corruption affects business decisions made by firms. In the first essay (co-authored with Jacqueline Garner and Adam Yore), we study how do firms respond when operating within a corrupt environment. To answer this question, we analyzes the interaction between the degree of local political corruption, lobbying expenditures, corporate investment, the cost of capital, and firm value. Using a sample of almost 11,000 firm year observations over a 12 year time period, we provide evidence that firms operating in corrupt political environments spend greater dollars on lobbying which helps secure safer cash flows. Consistent with a securing safer returns argument, these lobbying-intensive firms have less volatile cash flows and stock returns. They also exhibit lower costs of equity and an overall lower weighted average cost of capital. However, these benefits come at a cost: lobbying firms are associated with a reduction in spending on traditional investment such as research and development and capital expenditures. Overall, our evidence suggests that the misallocation of resources by firms operating in corrupt environments results in lower firm value, as measured by Tobin's q. The second essay (co-authored with David Becher and Jacqueline Garner) examines the relationship between U.S. firms' local area corruption and their acquisition decisions during the period of 1997-2009. While previous studies have shown that the corruption in the target's local area affects the completion and premiums paid, we find that these results are significantly dependent on the corruption of the acquirer's local area as well. When targets and acquirers are both from a corrupt area, completion rates are higher, while premiums and target returns are lower. These findings are consistent with our familiarity and bargaining hypothesis. Yet, acquirer shareholders benefit overall. We also find that firms will employ lobbying activities to influence merger outcomes in their favor. Lobbying activities by targets result in fewer completed deals, while lobbying activities by acquirers increase the probability of completion. We also observe that lobbying activities by both parties are related to longer completion times, and acquirer lobbying results in higher premiums, suggesting that lobbying is used with hard to complete deals. These results are not explained by location or industry. The evidence suggests that acquirers which have dealt with corrupt environments previously are able to overcome the costs related to the target's corrupt environment.