The consequences of involvement in foreign bribery cases : an empirical study of the profitability of firms sanctioned for FCPA violations

Abstract

Since the turn of the century, U.S. authorities have sanctioned more than a hundred firms for foreign bribery. The fines and other monetary penalties resulting from these cases have exceeded ten billion U.S. dollars in total. Individual cases have involved fines in the hundreds of millions. One could imagine that such large direct sanctions, combined with damage to the firms’ reputations, might cause worsened financial performance. Using a fixed effects model, we perform an empirical analysis of the profitability of 107 firms sanctioned between 2000 and 2016 for violations of the U.S. Foreign Corrupt Practices Act (FCPA). Our choice of model ensures robust estimates and mitigates the risk of bias due to omitted variables, enabling us to reach reliable results on a complicated topic. We establish how the sanctions affect firms’ financial performance over time, measured as return on assets. Additionally, we analyze profitability during the period when the U.S. Securities and Exchange Commission has identified involvement in foreign bribery. We find no significant adverse effect of being sanctioned for foreign corruption on long-time financial performance. Profitability does not seem to be influenced by an FCPA investigation, nor does it seem to be affected following the final sanction. This could be attributed to foreign bribery cases not causing significant reputational damage. A potential explanation is that FCPA cases are most commonly resolved through negotiated settlements, rather than through criminal convictions. However, we do find that the companies subject to the largest monetary sanctions perform worse than usual around the time of the sanctioning. Furthermore, we identify that firms generally perform worse during the period when they engage in corruption. We consider this somewhat surprising, as one would expect companies to commit illegal acts with the expectation of achieving superior profits. We hypothesize that the pressures of bad performances may instead lead firms to pay bribes. It could nevertheless be that the corrupt acts do not generate net profits, for instance due to extortion or distortive meddling.