If academic researchers want to quantify the value of lobbying they can usually look at how much different companies spend on it (controlling for size, industry, and other factors) and compare outcomes to get a sense of how effective it was. But pinning a dollar value on corruption, aside from being more controversial, is a lot harder for the simple reason that no one is going to report an illegal tit-for-tat.

In their recent paper The corporate value of (corrupt) lobbying, three researchers have tried to get around this problem by asking a related question: which companies take the biggest hit when corrupt lobbying practices become more difficult?

Using ‘negative exogenuous’ to study the impact of corrupt lobbying

To answer this question University of Cincinnati assistant professor of finance Alexander Borisov and Indiana University associate professors of finance Eitan Goldman and Nandini Gupta look at three ‘negative exogenous’ events that would likely curtail corrupt lobbying in the future. The main event they studied was former DC lobbyist Jack Abramoff’s guilty plea on January 3, 2006, but they also looked at the introduction of a bill by former Republican Senator Trent Lott on March 1, 2006 and the FBI raid of Paul Magliocchetti’s lobbying firm PMA Group on November 25, 2008.

For each event they compared companies’ lobbying expenditures with abnormal negative returns in the days following the event and in the case of the Abramoff plea they found that for every one standard deviation increase in average lobbying expenditures ($6.8 million) there was a 0.20% drop in returns compared to the rest of the market.

Since there’s nothing inherently wrong with lobbying, the researchers also looked at a couple of proxies for corporate ethics since a company that cuts corners in one area is more likely to cut corners somewhere else as well. They found that companies that had been charged with an SEC violation in the five years before the plea had a 0.34% larger drop in value than companies that didn’t have any charges, those with anti-bribery and anti-corruption policies fared better than those without, and companies with high independent corporate social responsibility (CSR) ratings did better than those with low ratings.

Lott’s introduction of anti-corruption legislation and the raid on PMA Group had similar but less pronounced effects on corporate value. The subsequent passage of Lott’s legislation and PMA finally shutting down didn’t a significant effect, but that’s probably just means the market had already priced in those expected outcomes.

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Study measures market reaction, not the change to corporate value

The idea of using market reactions to external events is an interesting way to study corruption, and one that Borisov, Goldman and Gupta don’t think has been tried before, but it’s unfortunate that they used such a short time frame to measure the results. Over the period of a couple of days you only get to see the market’s opinion on which companies are more or less likely to be engaged in illegal lobbying, and it’s no surprise that the ones with smudged record get hit the hardest.

But what you’d really like to know is which companies’ business models start to suffer when the flow of illicit favors gets cut off. You might be able to study that using proxies, but it would take longer than a couple of days to show up.