Firm Misconduct and the Structure of Political Spending

In this study, I predict that involvement in a fraud-related securities class action lawsuit is associated with a change in political activity patterns toward less transparent channels and a reduction in the quality of public political disclosures. Allegations of fraud may impair a firm’s reputation and cause the firm to reevaluate the effectiveness of its political strategies. I find evidence that firms involved in a fraud-related securities class action lawsuit are associated with less political action committee (PAC) contributions and more lobbying after the accusation. I find a similar pattern for additional measures of transparency: firms shift from in-house lobbying to contract lobbying, are more likely to spend through their subsidiaries, and increase activity through their subsidiaries in the period after the fraud-related securities class action lawsuit. I also find that firms significantly reduce the level of their voluntary political spending disclosures. Overall, my results provide evidence of a change in real activities and disclosures after an accusation of fraud. While prior research documents that firms generally work to improve their reputations following a fraud, I find evidence that firms reduce the transparency of their corporate political spending and related disclosures.