Corporate Lobbying and Fraud Detection

TLDR

The study investigates how corporate lobbying relates to fraud detection. Firms that lobby experience a lower hazard of fraud detection, evading detection 117 days longer and being 38% less likely to be caught, while fraudulent firms spend 77% more on lobbying overall and 29% more during fraud periods, resulting in longer detection delays, greater resource misallocation, and increased share sales.

Abstract

Abstract This paper examines the relation between corporate lobbying and fraud detection. Using data on corporate lobbying expenses between 1998 and 2004, and a sample of large frauds detected during the same period, we find that firms’ lobbying activities make a significant difference in fraud detection: Compared to nonlobbying firms, on average, firms that lobby have a significantly lower hazard rate of being detected for fraud, evade fraud detection 117 days longer, and are 38% less likely to be detected by regulators. In addition, fraudulent firms on average spend 77% more on lobbying than nonfraudulent firms, and they spend 29% more on lobbying during their fraudulent periods than during nonfraudulent periods. The delay in detection leads to a greater distortion in resource allocation during fraudulent periods. It also allows managers to sell more of their shares.