Companies headquartered in U.S. states with higher levels of political corruption pay out more to investors through dividends and stock buybacks, according to new research by three Canadian academics.
The paper, set to be published in the February 2021 issue of the Journal of Banking & Finance, appears to be the first to examine corruption and dividends on a state-by-state level. The researchers found that the dividend payouts at firms in high-corruption states is 4% higher than at those in low-corruption states — a statistically significant difference.
“I’m surprised the connection is as robust as it is,” said co-author and Concordia University finance professor Lawrence Kryzanowski of the link between corruption and corporate payouts.
Kryzanowski conducted the research alongside his former doctoral student Ashrafee Tanvir Hossain of the Memorial University of Newfoundland, as well as Hossain’s brother Takdir Hossain, also of Concordia University.
The researchers measured corruption primarily by examining the number of corruption prosecutions per capita in each state. While that number can vary due to political pressure, federal prosecutors are typically responsible for enforcing corruption laws, Kryzanowski said.
“The convictions are really much more at the national level in the U.S., so there can be and probably are some differences between the different regions, but it’s likely to be more homogeneous than if it was strictly at the state level,” said Kryzanowski.
However, the researchers also incorporated other factors that could affect corruption, such as local political codes of ethics, media interest and religiousness.
“You have to do a lot of tests to prove that the relationship is robust,” said Kryzanowski. “I think we provide enough tests to convince readers, referees that it is probably causal … but as you know, in the social sciences you can never prove anything conclusively.”
Kryzanowski said that his research is especially relevant amid the ongoing boom in environmental, social and governance, or ESG, investing. While much of the press around ESG has focused on environmental factors like emissions and social factors like racial and gender diversity, corruption also plays a very important role as investors screen for responsible corporate governance.
“The ‘G’ part is becoming quite important,” said Kryzanowski. “A lot of firms, before they make investments, that’s an area they spend time on, doing investigations.”
Kryzanowski developed the idea for the paper during a series of conversations with Ashrafee Tanvir Hossain and Takdir Hossain in 2018, he said. All three researchers contributed an equal amount of work to the project. It builds on other recent work finding links between corruption and corporate payouts in other contexts.
In a 2017 Journal of Corporate Finance paper, a group of researchers from the U.S. and Hong Kong linked lower political freedom to lower dividend payments. And in 2020, Quoc Trung Tran of Foreign Trade University in Vietnam found a link between corruption and dividends based on a review of 47 countries. Tran’s paper was published in the Quarterly Review of Economics and Finance.
Kryzanowski and his co-writers differentiated their work both by examining corruption and dividends on a U.S. state-by-state basis and by including share buybacks as a type of payout.
International studies typically do not consider stock buybacks because they do not exist in some countries, especially emerging economies, the researchers said.
“Corruption has been an area that I’ve been concerned about for quite a long time, and the U.S. is a good avenue for [researching] that because there’s a lot more data,” said Kryzanowski.
Kryzanowski is also currently looking into corruption and insider trading in China alongside a group of Chinese researchers. While it can still be difficult to research corruption in China, he said, "The data has improved quite a bit.”
In addition, he is developing a working paper on the connection between executive pay and corruption on the U.S. state level, as well as the connection between corporate board diversity and firm performance.
Kryzanowski said that research for the diversity paper has so far shown that while racial diversity improves firms’ performance, gender diversity does not. However, he added that the research is not complete.
The paper, called “Political corruption and corporate payouts,” will be published in the February 2021 issue of the Journal of Banking & Finance. Takdir Hossain and Lawrence Kryzanowski of Concordia University as well as Ashrafee Tanvir Hossain of the Memorial University of Newfoundland were co-authors. Ashrafee Tanvir Hossain was the lead author.