Public Corruption in the United States Implications for Local Firms

We study the relation between public corruption and the value as well as disclosure policies of firms at the state level in the United States. Consistent with our hypotheses, firms have significantly lower value (Tobin's Q) and informational transparency in more corrupt areas. Local corruption has a less negative effect on industries that sell primarily to the government, suggestive of quid-pro-quo between these firms and public officials. Several tests address endogeneity concerns: e.g., firms located in different states but close to state-borders are affected by differences in state-level corruption, indicating legal jurisdiction matters despite similar local conditions. Results are robust to instrumenting for corruption using long-established institutional variables; and events likely to increase scrutiny of corrupt activities have a more negative announcement-period effect on firms in corrupt environments