We examine how political corruption affects corporate investment. We find firms in more corrupt states invest less than firms in less corrupt states. Our results are robust to using alternative investment measures, alternative corruption measures, and different regression specifications. Further, we find that the negative effect of corruption became insignificant after the enactment of Dodd–Frank Whistleblower Provision. The impact of the Dodd–Frank Whistleblower Provision is stronger in states with higher corruption. Our findings suggest that political corruption hinders investment, but the changes in legal environments can help firms reduce the decline in investments in highly corrupt states.

We investigate how a state's political corruption affects a resident firm's debt contracting and how a change in anti-corruption regulation alters the relation between corruption and loan contracting. Firms in more corrupt states are associated with significantly higher loan spreads and tighter loan covenants than firms in less corrupt states. Furthermore, the passage of the Dodd–Frank whistleblowing provision amplifies the conhcerns of banks about the detrimental impact of corruption due to the increased exposure of firms to whistleblowing threats. The detrimental impact of corruption is further amplified when a state has a higher level of whistleblowing involvement, when firms are located in more corrupt states or closer to the SEC office, and when the bank's state is less corrupt than the firm's state. In general, we document the externality of corruption in the debt financing of firms and the response of banks to changes in regulation.