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Is the revolving door of Washington a back door to excess corporate returns?

Author

Listed:
  • Mehmet I. Canayaz

    (Said Business School, University of Oxford)

  • Jose V. Martinez

    (School of Business, University of Connecticut)

  • Han N. Ozsoylev

    () (Said Business School, University of Oxford and College of Administrative Sciences and Economics, Koç University)

Abstract

In this paper, we look into the so-called "revolving door of Washington", which is the movement of individuals between federal government positions and jobs in the private sector, and examine its link to long-run stock returns. We find that firms where current public officials become future employees outperform other firms by a statistically significant 7.43% per year in terms of four-factor alpha. This result is robust to different weighting methodologies and risk adjustments, and to plausible reverse causality arguments. We also show that firms receive more valuable government contracts from a government agency when a future firm employee is holding a post at that agency. Such financial gains are significantly reduced during periods in which presidential executive orders restrict revolving door movements. Our results are consistent with the notion that some public officials could be favoring certain companies while in office with a view to gaining future corporate employment.

Suggested Citation

  • Mehmet I. Canayaz & Jose V. Martinez & Han N. Ozsoylev, 2015. "Is the revolving door of Washington a back door to excess corporate returns?," Koç University-TUSIAD Economic Research Forum Working Papers 1507, Koc University-TUSIAD Economic Research Forum.
  • Handle: RePEc:koc:wpaper:1507
    as

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    File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1507.pdf
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    References listed on IDEAS

    as
    1. Eitan Goldman & Jörg Rocholl & Jongil So, 2009. "Do Politically Connected Boards Affect Firm Value?," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2331-2360, June.
    2. Michael J. Cooper & Huseyin Gulen & Alexei V. Ovtchinnikov, 2010. "Corporate Political Contributions and Stock Returns," Journal of Finance, American Finance Association, vol. 65(2), pages 687-724, April.
    3. Lucca, David & Seru, Amit & Trebbi, Francesco, 2014. "The revolving door and worker flows in banking regulation," Journal of Monetary Economics, Elsevier, vol. 65(C), pages 17-32.
    4. Spiller, Pablo T, 1990. "Politicians, Interest Groups, and Regulators: A Multiple-Principals Agency Theory of Regulation, or "Let Them Be Bribed."," Journal of Law and Economics, University of Chicago Press, vol. 33(1), pages 65-101, April.
    5. Jordi Blanes i Vidal & Mirko Draca & Christian Fons-Rosen, 2012. "Revolving Door Lobbyists," American Economic Review, American Economic Association, vol. 102(7), pages 3731-3748, December.
    6. Li, Hongbin & Meng, Lingsheng & Wang, Qian & Zhou, Li-An, 2008. "Political connections, financing and firm performance: Evidence from Chinese private firms," Journal of Development Economics, Elsevier, vol. 87(2), pages 283-299, October.
    7. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    8. Grace, Martin F. & Phillips, Richard D., 2008. "Regulator performance, regulatory environment and outcomes: An examination of insurance regulator career incentives on state insurance markets," Journal of Banking & Finance, Elsevier, vol. 32(1), pages 116-133, January.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Corporate political connections; government contracts; regulatory capture; revolving door.;

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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