Political connections, tacit power and corporate misconduct

Abstract

This paper examines the impact of political connections (i.e., lobbying and political contributions) on the time it takes to detect corporate misconduct and the size of penalties following securities class actions (SCAs), restatements and Accounting and Auditing Enforcement Releases (AAERs).We find firms with political connections exhibit longer misconduct periods for SCAs, and such ability to conceal misconduct for longer translates into a larger settlement size.In addition, we find politically connected firms are associated with greater shareholder losses and are less likely to be involved in Securities Exchange Commission enforcement actions on restatements. Finally, while we do not find any relation between political connections and the likelihood of AAERs being settled, we find political connections are associated with lower AAER settlement size.

Corporate political activism, information transparency and IPO compliance costs

“…With respect to unintentional actions, the opaque information environment of politically connected firms may also be explained by the fact that the preferential government treatment of such firms weakens their regulatory and capital market incentives to produce high quality reports. Consistent with this interpretation, several studies report that connected firms face lower enforcement costs in that they are less likely to receive Accounting and Auditing Enforcement Releases and are also subject to lower penalties if prosecuted (McCarten et al., 2022; Mehta & Zhao, 2020; Correia, 2014; Yu & Yu, 2011). Also, Chaney et al.…”

“…Releases and are also subject to lower penalties if prosecuted (McCarten et al, 2022;Mehta & Zhao, 2020;Correia, 2014;Yu & Yu, 2011). Also, Chaney et al (2011) show that CPA firms have less informative accounting reports than their peers; yet they are subject to relatively less severe penalties from capital market participants for poor earning quality.…”

When politics meets sustainability: the effect of independent directors' political connections on corporate sustainability disclosure in China

“…Political connections can provide firms with legal advantages and offer protection against litigation risk for managers and directors (Jia et al, 2019). This soft power held by politically connected firms discourages agents from exposing corporate misconduct, allowing these firms to evade detection for longer periods (McCarten et al, 2022). Politically connected companies may prioritize their own interests over public concerns (Faccio, 2006(Faccio, , 2010, resulting in reduced commitment to disclosing high-quality accounting information.…”

“…, 2019). This soft power held by politically connected firms discourages agents from exposing corporate misconduct, allowing these firms to evade detection for longer periods (McCarten et al. , 2022).…”

Environment‐specific political risk mitigation: Political lobbying versus green innovation

“…Brown and Huang (2020) find that firms that spend more on political lobbying are more likely to have greater access to federal officials capable of providing regulatory relief to firms. Although the existing literature often uses campaign contributions and lobbying expenditures to measure political spending or activity (McCarten et al., 2022; Unsal et al., 2016), we concentrate on only political lobbying expenditures as a more directly observable measurement of political spending. Lobbying expenditure is more targeted because it can influence legislation, government agencies and departments, such as the Environmental Protection Agency (EPA; Hersch et al., 2008).…”