Corruption and cash policy: evidence from a natural experiment

This paper studies the effects of a 2016U.S. Supreme Court decision that made it harder for prosecutors to bring corruption cases against public officeholders. The authors find that regulated firms headquartered in high-corruption areas, which are most vulnerable to political corruption, became less likely to be penalized by government agencies after the decision. Analyzing litigated cases, the authors find a decrease in anti-corruption enforcement and an increase in the magnitude of alleged bribes to public officials. Affected firms increased cash reserves in the years after the decision. After ruling out alternative explanations for this increase in cash ratio, the authors interpret it as suggestive evidence that the exogenous shock to anticorruption enforcement led to an increase in alleged bribery for affected firms, because cash is a liquid and anonymous asset often used for illicit payments. Finally, affected firms experienced negative abnormal returns near the decision, suggesting that reduced anticorruption enforcement decreased firm value.