The Effect of Self-Reporting Policies on Cross-Border Investment: Evidence from the Foreign Corrupt Practices Act

Abstract

I study the impact of the U.S. Department of Justice’s self-reporting policy for the Foreign Corrupt Practices Act (FCPA) on cross-border investment. I find that the establishment of a policy which rewards firms for self-reporting corruption violations reduces the likelihood that FCPA-exposed acquirers engage in high-risk mergers and acquisitions. These results are more pronounced for larger acquirers, who face relatively higher penalties for FCPA violations. Consistent with firms perceiving the self-reporting policy as an increase in expected enforcement costs, I find that FCPA-exposed firms seek forms of cross-border investment where uncertainty regarding pre-existing misconduct is reduced to zero: establishing new subsidiaries. In deal-level analyses, I document additional uncertainty-reducing measures that FCPA-exposed firms take within high-risk deals during the self-reporting regime. FCPA-exposed firms increase the length of due diligence on high-risk targets, and this increase does not appear to be due to acquirers choosing relatively riskier target firms. Taken together, my findings suggest that self-reporting policies designed to curb misconduct can lead to reduced risk-taking in cross-border investments.