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The Revolving Door for Financial Regulators

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  • Sophie A. Shive
  • Margaret M. Forster

Abstract

We investigate the motivations and effects of financial firms’ hiring of former US financial regulatory employees. The number of top executives with regulatory experience per firm has increased 24% over 2001–15, and hiring is associated with positive average announcement returns and a salary premium. In the quarter after hire, market and balance sheet measures of firm risk decrease significantly and measures of risk management activity increase, especially for hires from prudential regulators, who directly monitor financial firm risk. The absence of this result for unregulated firms and for exogenous shocks to regulatory experience suggests that firms hire ex-employees of their regulators when they perceive a need to reduce risk, consistent with a schooling hypothesis. We find little direct evidence of quid pro quo behavior in regulatory event frequency and fines.

Suggested Citation

  • Sophie A. Shive & Margaret M. Forster, 2017. "The Revolving Door for Financial Regulators," Review of Finance, European Finance Association, vol. 21(4), pages 1445-1484.
    • Handle: RePEc:oup:revfin:v:21:y:2017:i:4:p:1445-1484.
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    File URL: http://hdl.handle.net/10.1093/rof/rfw035
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    References listed on IDEAS

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    1. Acemoglu, Daron & Johnson, Simon & Kermani, Amir & Kwak, James & Mitton, Todd, 2016. "The value of connections in turbulent times: Evidence from the United States," Journal of Financial Economics, Elsevier, vol. 121(2), pages 368-391.
    2. deHaan, Ed & Kedia, Simi & Koh, Kevin & Rajgopal, Shivaram, 2015. "The revolving door and the SEC’s enforcement outcomes: Initial evidence from civil litigation," Journal of Accounting and Economics, Elsevier, vol. 60(2), pages 65-96.
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    Cited by:

    1. Kempf, Elisabeth, 2020. "The job rating game: Revolving doors and analyst incentives," Journal of Financial Economics, Elsevier, vol. 135(1), pages 41-67.
    2. Ms. Deniz O Igan & Thomas Lambert, 2019. "Bank Lobbying: Regulatory Capture and Beyond," IMF Working Papers 2019/171, International Monetary Fund.
    3. Lim, Ivan & Hagendorff, Jens & Armitage, Seth, 2019. "Is the fox guarding the henhouse? Bankers in the Federal Reserve, bank leverage and risk-shifting," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 478-504.
    4. Jagan Krishnan & Jayanthi Krishnan & Steven A. Maex, 2024. "Does audit firm hiring of former PCAOB personnel improve audit quality?," Review of Accounting Studies, Springer, vol. 29(4), pages 3130-3175, December.
    5. de C. Griebeler, Marcelo & F. Damo, Alexandre, 2021. "Serving three masters: optimal monetary and regulatory policies when central bankers have career concerns," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 75(3), December.
    6. Reint Gropp & Steven Ongena & Jörg Rocholl & Vahid Saadi, 2022. "The cleansing effect of banking crises," Economic Inquiry, Western Economic Association International, vol. 60(3), pages 1186-1213, July.
    7. Michelson, Noam, 2023. "The revolving door of former civil servants and firm value: A comprehensive approach," European Journal of Political Economy, Elsevier, vol. 79(C).
    8. Luechinger, Simon & Moser, Christoph, 2020. "The European Commission and the revolving door," European Economic Review, Elsevier, vol. 127(C).
    9. Charles-Cadogan, G., 2021. "Market Instability, Investor Sentiment, And Probability Judgment Error in Index Option Prices," CRETA Online Discussion Paper Series 71, Centre for Research in Economic Theory and its Applications CRETA.
    10. Wang, Ping & Wang, Xiaochun & Wu, Jie, 2023. "Executives' regulatory experiences and corporate social responsibility," Finance Research Letters, Elsevier, vol. 55(PB).
    11. Thomas Schneider & Philip E Strahan & Jun Yang, 2023. "Bank Stress Testing: Public Interest or Regulatory Capture?," Review of Finance, European Finance Association, vol. 27(2), pages 423-467.
    12. Thomas Lambert, 2019. "Lobbying on Regulatory Enforcement Actions: Evidence from U.S. Commercial and Savings Banks," Management Science, INFORMS, vol. 67(6), pages 2545-2572, June.
    13. Shy, Oz & Stenbacka, Rune, 2024. "Lobbying and liquidity requirements: Large versus small banks," Journal of Financial Stability, Elsevier, vol. 74(C).
    14. Matteo Cotugno & Antonio D'Amato & Angela Gallo & Valeria Stefanelli, 2021. "Do supervisory enforcement actions affect board composition?," Corporate Governance: An International Review, Wiley Blackwell, vol. 29(1), pages 22-44, January.
    15. Antonín Korauš & Ján Dobrovič & Jozef Polák & Stanislav Backa, 2019. "Aspects of the security use of payment card pin code analysed by the methods of multidimensional statistics," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 6(4), pages 2017-2036, June.
    16. Thomas Ian Schneider & Philip E. Strahan & Jun Yang, 2020. "Bank Stress Testing: Public Interest or Regulatory Capture?," NBER Working Papers 26887, National Bureau of Economic Research, Inc.
    17. Prasanna Gai & Sherry X. Wu, 2023. "On Market‐Friendly Central Bankers," The Economic Record, The Economic Society of Australia, vol. 99(325), pages 238-252, June.
    18. Zhang, Karen & Truong, Cameron, 2019. "What’s the value of politically connected directors?," Journal of Contemporary Accounting and Economics, Elsevier, vol. 15(3).
    19. Jonas Heese, 2022. "Does Industry Employment of Active Regulators Weaken Oversight?," Management Science, INFORMS, vol. 68(12), pages 9198-9218, December.
    20. Jan Libich & Liam Lenten, 2022. "Hero or villain? The financial system in the 21st century," Journal of Economic Surveys, Wiley Blackwell, vol. 36(1), pages 3-40, February.
    21. Claes Axel Belfrage & Markus Kallifatides, 2018. "The politicisation of macroprudential regulation: The critical Swedish case," Environment and Planning A, , vol. 50(3), pages 709-729, May.
    22. Gopalan, Yadav, 2022. "The effects of ratings disclosure by bank regulators," Journal of Accounting and Economics, Elsevier, vol. 73(1).

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    More about this item

    Keywords

    Financial regulation; Revolving door;

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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