Negation of Sanctions: The Personal Effect of Political Contributions

Abstract

We show that political contributions are associated with reduced civil and criminal sanctions for fraudulent executives. These managers benefit more from contributions if their firm also gained from the fraud, if they occupy top positions in firms with weak boards, or if they contribute to powerful politicians. Political contributions reduce budgetary resources for government enforcers and lengthen the Securities and Exchange Commission’s case time-to-resolution. They also facilitate penalty transfer from fraudulent managers to the firm, resulting in their entrenchment and long-term destruction of shareholder value. Our findings highlight an agency cost of political contributions and a mechanism undermining the disciplining effect of regulations.

Political connections, tacit power and corporate misconduct

“…Similarly, Fulmer et al. (2012) find that Chief Executive Officers (CEOs) that make political contributions receive less severe penalties from the SEC. Hence, political connections may negatively impact the effectiveness of the SEC as a regulatory entity.…”

“…Correia (2014) finds that politically connected firms face fewer SEC enforcement actions, lower penalties and lower potential enforcement costs. 4 Similarly, Fulmer et al (2012) find that Chief Executive Officers (CEOs) that make political contributions receive less severe penalties from the SEC. Hence, political connections may negatively impact the effectiveness of the SEC as a regulatory entity.…”

Corporate fraud and industry peer effects on IPO underpricing

“…Corporate fraud involves a conflict of interest between the firm's management and shareholders: managers have compelling incentives to inflate a firm's prospects, whereas shareholders can endure significant financial losses when their firms are accused of financial fraud. Fulmer et al (2022) find that the total damages assessed to the shareholders attributable to an executive's misconduct average a staggering $456.4m per firm, while an average executive is fined just 2.86 times his or her annual compensation and spends only 127 days on probation and 224 days in prison. The authors further find that these executives pay even lower fines and serve less time on probation and in prison if they make political contributions.…”