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Paper: FCPA enforcement actions don’t hurt profitability

Companies are penalized hundreds of millions of dollars for corruption. But are the penalties high compared to what the companies go on to earn?

In our thesis we compare the profitability of companies that are penalized for corruption by the U.S. Securities and Exchange Commission with the profitability of companies included in the S&P 500 marked index that are not penalized for corruption. The comparison is based on different measures of firm performance.

Through a descriptive and empirical analysis, we investigate how the two groups of companies have performed over a time span of 15 years, between 2000 and 2015. We want to find out if paying financial penalties for corruption influences the profitability of a company.

Our most important finding is what we do not find. There is no significant difference in performance between the two groups. This implies that in the long term there are no negative consequences of corruption related to firm performance. And as an investor there are no downside to investing in a corrupt company.

This lack of impact on performance is supported by both the descriptive analysis and the empirical analysis. The descriptive analysis describes the development in stock price, return on assets, market capitalization and Sharpe ratio. The analysis finds that an investment in the portfolio of corrupt companies would beat the S&P500 index in most years between 2000 and 2015.

The econometric analysis describes the relative change in stock prices as dependent variable, and tries to isolate the effect from the variable indicating whether or not the company is fined by the SEC. This is a thorough analysis of more than 5,000 observations on panel data form. The econometric analysis supports the findings in the descriptive analysis — that there are no difference in performance.

We use stock price as we believe that it is the most holistic measurement on firm performance. We argue that the stock price incorporate relevant information that is not included in the for example company earnings or other measures of performance. For example the cost of losing a potential contract. 

As an owner, you have no incentive to work for less corruption in your business, because you either win on the corruption if you don’t get caught, or you perform like everyone else if you get caught. If moral costs are disregarded, there is no downside on investing in a corrupt company in the perspective of the owner.

We do not look at the case of the CEO or employees, as the consequences can be very serious, including time in jail or social stigma.  

Notwithstanding our findings, we believe that corruption is a problem in our society, and it leads to suboptimal development. Budgets are not distributed in the correct manner, and taxes are lost both directly and indirectly through reduced investment activity. In addition, corruption leads to compromises on quality, which in the worst case takes lives. We need a more diverse portfolio of legal tools, and a more globalized effort to fight corruption.

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Our paper has not yet been translated into English. But if you’d like to know more, please reach out to us:

Kasper Vagle:
MSc International Management
MSc Strategy and Management
(Norwegian School of Economics)
Email: [email protected]
Connect with Kasper on  

Stian Nalum Tvetene:
MSc Financial Management
(Norwegian School of Economics)
Email: [email protected]
Connect with Stian on

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