The Deterrent Effect of Anti-Bribery Law Enforcement on the Quality of Earnings

This paper studies the effect of anti-bribery enforcement on the accrual quality of investigated firms and their peers. We analyze a hand-collected sample of 241 bribery cases investigated under the US Foreign Corruption Practices Act (FCPA) over the period 1978-2015. Exploiting the disclosure of anti-bribery law enforcement actions, we document a positive effect on the accrual quality of investigated firms’ peers, but not the investigated firms themselves. Additional tests document that this positive effect is significant only for cases revealed before 2005, when the prosecutors developed their enforcement activity and the use of alternative resolution vehicles. Our results show a positive impact of anti-bribery law enforcement that incentivizes peer firms to enhance their accrual quality once they acknowledge bribing behavior in their industry.