Fiscal monitoring policy and corporate R&D productivity

Abstract

We examine how the staggered, state-level adoption of fiscal monitoring policy (FMP), an exogenous shock to local political corruption, affects corporate research and development (R&D) productivity, measured as the firm-specific output elasticity of R&D. Our sample covers all S&P 500 constituents, which together account for roughly 80% of total US public market capitalization, over 2001–2023. Using a staggered difference-in-differences (DiD) estimator, we find a positive and statistically significant relationship between FMP adoption and R&D productivity: firms headquartered in FMP states achieve higher R&D productivity than those in non-FMP states. This pattern is consistent with a corruption channel operating through three complementary sub-mechanisms: resource reallocation, merit-based allocation of public R&D subsidies, and human capital retention. The result holds under alternative measures of R&D productivity, alternative estimation techniques, and a battery of endogeneity tests. The effect is also heterogeneous. Business strategy, the inevitable disclosure doctrine (IDD), and cultural tightness negatively moderate the relationship between FMP and R&D productivity, while environmental dynamism moderates it positively; municipal transparency and state-level institutional quality further amplify it, underscoring the importance of public-sector governance quality for the effectiveness of fiscal oversight. These findings carry implications for policymakers designing governance interventions that account for institutional quality and local oversight in shaping corporate innovation productivity.