Zhizhen Lu

PhD Candidate


Department of Government

The University of Texas at Austin

Targeted Regulatory Deterrence And Private Economic Sanction Compliance in Peace and Conflict

Governments encourage firms to include economic sanction compliance into corporate governance. However, skeptics claim that corporate self-policing is mostly symbolic. Can private self-regulation initiatives improve MNC economic sanction compliance? I argue that private self-regulation creates targeted regulatory deterrence such that firms subject to intense enforcement oversight are likely to drop risky deals when private compliance reveals high transaction-level risks. Low-risk firms will proceed nonetheless because the chance of enforcement is small. I first develop a measure of sanction-prone sectors from past OFAC enforcement cases to assess firms' sanction risk perception, as regulatory deterrence spread through shared sectoral membership. Then I examine the impact of a 2019 US guideline for private compliance with OFAC sanctions on 9,030 cross-border mergers and acquisitions (M&A) from 2016-2022. In the post-framework period, deals involving risky acquirers or targets after the OFAC guideline are at least 20 percent less likely to succeed when the due diligence lasts four months or longer. As due diligence prolongs, the success rate of risky deals slides even further. This negative impact is absent before the OFAC guideline and does not affect transacting parties from tax havens or placebo sectors. Additionally, I find the Russian invasion reduced deal success across the board, indicating that regulatory changes influence firm behavior in a targeted way while geopolitical shocks have a global impact. This study provides the first transaction-level evidence of MNC sanction compliance and highlights the importance of regulatory politics in shaping corporate compliance incentives amid rising geopolitical competition. 
Relative Hazard Ratio Pre- and Post-OFAC Framework