Purpose
The purpose of this study is to investigate the effect of corruption on stock returns in the USA. In particular, this study examines the relationship between corruption in a state (i.e. local corruption) and stock returns of firms headquartered in that state (i.e. local returns).
Design/methodology/approach
This paper uses the Fama–MacBeth two-step regressions. In the first step, the authors estimate the coefficients on the market, size, value and momentum factors for individual stocks. In the second step, they use those coefficients along with the corruption score of the state where stocks are headquartered to explain stock returns.
Findings
This paper finds that corruption in a state adversely affects stock returns of firms headquartered in that state. It further documents that the effect of corruption on stock returns is limited to geographically concentrated firms.
Originality/value
To the best of the authors’ knowledge, this paper is the first to document the effect of state-level corruption on individual stock returns in the USA using the Fama–MacBeth regressions. This study contributes to the literature by documenting the effect of local corruption on local stock returns in a low corruption country.
This paper reviews and summarizes the forensic management literature from late 2016 to late 2019, covering laboratory decision making, business strategy, and industry identity and transparency. The review papers are also available at the Interpol website at:
https://www.interpol.int/content/download/14458/file/Interpol%20Review%20Papers%202019.pdf
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