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This paper establishes novel evidence on the influence of politicians’ electoral incentives in shaping foreign trade. Using exogenous variation in the timing and geographic location of U.S. Congressional elections, we find that the probability of a Foreign Corrupt Practices Act (FCPA) enforcement action against foreign firms located in a given Senator’s state increases significantly pre-election, spiking over 200%, with no commensurate increase for equivalently global (but domestically-headquartered) firms in that same Senator’s state. Using hand-collected case-level data from the SEC and DOJ, we observe these cases to be weaker overall, along with being brought significantly more often pre-election when the foreign firms are in less important industries in the Senator’s state, and when they have a smaller overall US presence. This spike in foreign firm targeting is accompanied by a significantly larger spike in traditional and social media coverage (relative to US firms) coupled with sharply negative sentiment. Further these enforcement actions and media spikes are associated with electoral implications, leading to greater vote-shares and better poll results for Senators. Moreover, the FCPA enforcement actions have real impacts on firms: such as a 10% reduction in market value surrounding enforcement actions against foreign firms, along with a significant decrease in credit ratings.
The Foreign Corrupt Practices Act (FCPA) has become a major focus for corporations, the Securities and Exchange Commission (SEC), and the Department of Justice (DOJ), as indicated by the dramatic increase in the number of FCPA enforcement actions and the level of civil and criminal penalties. Prior regulatory practice shows that the SEC and the DOJ struggle not only to evaluate the severity of a company's FCPA violation, but also to establish the penalty amount. Given the difficulty in assessing penalties, the severity of a company's FCPA violation at times appears mismatched with the size of the penalty. Leveraging signaling theory, this study predicts and finds that when a company's FCPA violation severity and the size of the penalty imposed are mismatched, investors experience ambiguity in assessing the company's future prospects and, in effect, are more likely to give the company the benefit of the doubt. In this case, investors' company risk assessments are dampened, and they show a higher willingness to maintain their investment in the company. However, when the severity of the company's FCPA violation and the penalty amount match, investors are less likely to experience ambiguity, which leads to higher company risk assessments and a lower willingness to maintain their investment in the company. In addition, the combination of a more severe FCPA violation and high penalty amount results in the highest risk assessment and lowest willingness to maintain the investment. These results provide ethical and practical considerations that regulatory bodies should weigh in evaluating sanctions.