Abstract

We test the hypothesis that US corporations headquartered in states with greater public corruption are also prone to more unethical behavior when operating abroad. We exploit passage of Foreign Corrupt Practices Act that curtailed bribery of foreign officials and find firms in corrupt states, especially those exporting to more corrupt countries, suffer greater performance decline following FCPA, suggesting larger loss from anticipated bribery restrictions. Controlling for industry, firms in corrupt states are more likely to be targets of FCPA enforcement actions. They are also more likely to have paid foreign bribes, as disclosed during pre-FCPA investigations.