The Effects of Political Risk on Corporate Compliance Violation

This paper examines whether firm-level political risk predicts compliance violation costs. We find a positive relationship between political risk and the likelihood, quantity, and magnitude of compliance violation fines and settlements. This relationship is robust to various cost measures and persists for the most significant components of compliance violations and political risk. This relationship is not due to time-invariant effects or other risk measures. Furthermore, we demonstrate that the relationship between compliance violation costs and realized cash flows is significantly stronger for firms with a high degree of political risk than low-risk firms. Our findings indicate that political risk exposure is costly in developed countries, which opens up further questions about how effectively exposed firms mitigate such risk