Political corruption shielding and corporate acquisitions

Abstract

Corruption includes rent‐seeking behavior by public officials (e.g., lavish in‐kind benefits and monetary kickbacks for contracts/permits/regulatory leniency, improper political contributions/support, etc.) that can negatively affect firm valuations, performances, and strategic choices. Shielding strategies are used to diminish rent‐seeking attractiveness of firms. Acquisitions provide a better channel than cash or leverage for assessing the wealth effects of shielding strategies. We find that the mean 3‐day announcement returns for acquirers for a large sample of U.S. domestic acquisitions between 1990 and 2014 is significantly lower for firms headquartered in relatively higher corruption states. Our results survive an array of robustness tests.

Consequences of Local Social Norms: A Review of the Literature in Accounting, Finance, and Corporate Governance

“…The findings are consistent with the notion that firms try to protect their resources from political rent-seeking. Hossain et al (2021) extend Smith (2016) by showing that US firms operating in more corrupt states pay higher dividends: a result that may explain the lower cash holdings of firms in more corrupt states as documented by Smith (2016). Also, the marginal value of dividends is higher for firms in corrupt states.…”

CEO inside debt and the acquisition of private targets

“…In a recent study, Hossain and Kryzanowski (2021c) show that state‐level corruption has significant influence on announcement period abnormal returns. In addition, Hossain and Jha (2020) find that there is a positive association between state‐level social capital and announcement period CARs.…”

Mergers and acquisitions research in finance and accounting: Past, present, and future

“…This includes the expertise and experience available to the firm in the form of their CEOs and boards (Burns et al, 2021; Fich & Nguyen, 2020). The role of a firm's internal expertise can be helpful in avoiding issues arising from political corruption (Hossain & Kryzanowski, 2021) and investment adviser misconduct (Gelman et al, 2021). This frontier of research has thus underlined the role played by human capital in a firm's leadership.…”