U.S. Political Corruption and Firm Financial Policies

Using a large panel of U.S. firms from 1980-2009, I examine the association between corruption on the part of political officials in a federal judicial district and the financial policies of public firms headquartered in that district. I find that corruption is negatively related to cash holdings, directly related to leverage, and that these relations are economically significant. These results are robust to firm fixed effects, an instrumental variable framework, the use of an alternative survey measure of corruption, and, further, are largest among firms who operate mainly around their headquarters. I also find that firm value tends to be lower when corruption is higher. Overall, the evidence suggests that firms reduce their capacity to pay bribes by managing liquidity down-ward and debt obligations upward when faced with a corrupt political environment. In other words, the local political environment plays a part in shaping financial policy