Political Values, Culture, And Corporate Litigation
Florida State University – College of Business
Florida State University – The College of Business
Alok Kumar
University of Miami – School of Business Administration
October 29, 2014
Management Science, 2015, 61(12): 2905-2925.
Abstract:
Using one of the largest samples of litigation data to date, we examine whether the political culture of a firm determines its propensity for corporate misconduct. We measure political culture using the political contributions of top managers, firm PACs, and its local residents. We show that firms with Republican culture are more likely to be the subject of civil rights, labor and environmental litigation than Democratic firms, consistent with the Democratic ideology that emphasizes equal rights, labor rights, and environmental protection. However, firms with Democratic culture are more likely to be the subject of litigation related to securities fraud and intellectual property rights violations than Republican firms whose Party ideology stresses self-reliance, property rights, market discipline, and limited government regulation. Upon litigation filing, both types of firms experience similar announcement reaction, which suggests that the observed relation between political culture and corporate misconduct is unlikely to reflect differences in expected litigation costs.
Political Values, Culture, And Corporate Litigation – Introduction
In the last decade, hundreds of CEOs and senior corporate managers of publicly traded companies have been convicted of illegal behavior that resulted in significant monetary and reputational costs to firm shareholders, auditors, analysts, and regulators. While many instances of such wrongdoings were financial in nature, the vast majority of them were violations of employment civil rights, labor laws, intellectual property laws, product liability, antitrust laws, and other related issues. Corporate litigation, even stemming from less egregious offences, is costly to the defendant firm as it leads to losses in market value, procedural costs, potential court penalties or settlement costs, reputational losses, management time and costs associated with follow-on litigation. Existing evidence suggests that the economic magnitude of these costs is quite large.
Why are certain firms more likely to misbehave than others? A large literature in accounting and finance has highlighted the important roles of auditors, corporate governance, executive compensation and the legal system in discouraging white collar crime.2 However, there is limited research on alternative mechanisms such as firm or local culture that may also affect a firm’s propensity of misconduct.
Although the relation between culture and corporate wrongdoing may appear intuitive, it is often difficult to quantify the cultural attributes that define the ethical boundaries of a firm. In this paper, we use the political environment within a firm and its locality to quantify one aspect of firm culture that may influence a firm’s propensity for misconduct. The key advantage of a politics-based measure of culture is that political party platforms allow us to explain differential propensities of wrongdoing across various domains (e.g., environmental, civil-rights, securities, etc.).
The choice of political values as an indicator of culture is motivated by the observation that an ideological tilt of a firm toward the Republican or the Democratic Party often reflects the firm’s identification with the core values of that Party.3 Prior research in psychology shows that ethical boundaries vary across the political spectrum because the set of moral foundations that defines a political ideology varies across political parties (e.g., Graham, Haidt, and Nosek 2009). Therefore, the political culture or environment surrounding a firm may have significant economic implications in domains that are strongly associated with various political ideologies.
Specifically, we conjecture that, compared to firms with Republican culture, firms with Democratic culture are less likely to violate civil rights, labor, or environmental laws because the Democratic ideology emphasizes equal rights, labor rights, and environmental protection.4 However, Democratic firms are more likely to commit securities fraud, where managers manipulate firm financials or market values of their firms’ securities, or violate intellectual property laws than Republican firms because the Republican ideology emphasizes the importance of free enterprise (i.e., an economic system built on the foundation of market forces), limited government regulation, property rights, and protection of individual economic interests.
To empirically test these conjectures, we quantify the political culture of a firm using a composite index (Political Culture Index, or PCI) that is based on the political leanings of the firm’s top managers, including its CEO, Political Action Committees (PACs), and local residents. We measure the political leanings using monetary contributions of individuals or PACs to various political campaigns. The contributions of PACs are likely to reflect the preferences of the firm’s shareholders,5 while those of local residents should be correlated with preferences of lower-level employees and corporate monitors located in the firm’s home-state. Further, personal political contributions of the top managers are likely to reflect their individual political values (Hutton, Jiang, and Kumar 2014; DiGiuli and Kostovetsky 2014).6 Thus, our composite political culture index captures the political attitudes of a firm’s employees across its organizational hierarchy, its shareholders, monitors, as well as other community stakeholders.
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