Political Connections and Public Corruption

Overview

The political connections literature within forensic finance spans a broad timeframe and includes a substantial body of research. This literature explores how firms' political ties can reflect potential illegal activities, such as bribes, and how resources are allocated based on political relationships. Although the nature of these connections is most pronounced in developing markets, such as Russia, studies also investigate their implications in developed markets like the U.S. The impact of political connections often results in firms receiving bailouts but subsequently underperforming, and recent research indicates that such ties can affect competition and pricing in various industries.

A significant portion of the literature focuses on political connections outside the U.S., especially in emerging markets. Faccio’s 2006 study, for instance, highlights that politically connected corporate executives control a substantial portion of global market capitalization, with particularly high levels in corrupt countries. Other research, such as that by Faccio, Masulis, and McConnell (2006), shows that politically connected firms are more likely to receive bailouts, though they tend to underperform post-bailout. In China, political connections are shown to negatively impact firm performance and lead to poor accounting practices, while also leading to implicit bribes and favorable financial arrangements for politicians.

Research also explores the effectiveness of anti-corruption campaigns and their impact on political connections. For example, China’s anti-corruption campaign under Xi Jinping had mixed results, with some positive stock price reactions and reductions in luxury expenditures, but little overall improvement in firm value or corruption levels. In contrast, Brazil’s anti-corruption measures from 2003 to 2014 were more successful in reducing corruption and allowing new market entrants. The literature underscores the value of detailed data in understanding the effects of political connections and highlights ongoing issues such as insider trading and lobbying, suggesting areas for further research to inform policy.