Government Subsidies and Corporate Fraud

Government Subsidies and Corporate Fraud Aneesh Raghunandan * Stanford University January 5, 2016 Abstract I study the relation between firms’ receipt of significant subsidies and their subse- quent propensities to engage in – and be caught engaging in – financial fraud. Firms who receive subsidies are likely to have greater influence over the politicians who award these subsidies (regulatory capture), but are also more likely to be subject to external scrutiny. Consistent with the idea of regulatory capture, I find that firms that receive tax breaks (governmental revenue decreases) tend to engage more frequently in fraud- ulent activity, and are less likely to be caught engaging in fraud by regulators and third parties conditional on engaging. However, such firms are less likely to engage as the magnitude of the tax break received increases. Conversely, firms that receive direct cash grants (governmental spending increases) or below-market-rate access to resources do not on average engage in fraud more or less frequently than those who do not, although these firms are also less likely to be caught when they do engage. * I thank Lisa De Simone for advising me on this project; Phil Mattera of Good Jobs First for providing me with data; Cindy Lu for providing research assistance; and Shai Bernstein, Beth Blankespoor, Ed deHaan, Kurt Gee, Rebecca Lester, Ken Li, Ivan Marinovic, Charles McClure, Maureen McNichols, Trung Nguyen, and Christina Zhu for helpful comments and suggestions. All errors are my own. 1

Government Subsidies and Corporate Fraud

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