Corporate Lobbying Reduces FRAUD Detection



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 fraud periods than during their non-fraud periods. The delay in detection allows managers to postpone the negative market reaction and to sell more of their shares.

Frank Yu
Barclays Global Investors

Xiaoyun Yu
Kelley School of Business
Indiana University

Lobbying Effective to Elude Fraud Investigations and Prosecutions

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