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Indiana University Bloomington

Department of Finance

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Research and Publications

Journal Articles

Corporate Lobbying and Fraud Detection

2011, Journal of Financial and Quantitative Analysis

Frank Yu, Xiaojing Yu

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 non-lobbying firms, firms that lobby on average 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 non-fraudulent firms, and spend 29% more on lobbying during their fraudulent periods than during non-fraudulent 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.

Citation

Yu, Frank and Xiaoyun Yu (2011), “Corporate Lobbying and Fraud Detection,” Journal of Financial and Quantitative Analysis, Vol. 46, No. 6, December, pp. 1865-1891.