A team of academics decided to take a close look at the so-called revolving door of Washington, that is, individuals moving from federal government positions into the private sector. The idea was to examine the relationship between link between senior government employees joining private sector firms and long-run stock returns.
The study found that at firms where current public officials became future employees outperformed other companies by a statistically significant 7.43% annually in terms of four-factor alpha. The researchers note their results remain valid at different weighting methodologies and risk adjustments, and to all plausible reverse causality arguments. The data also shows that firms end up with more valuable government contracts from a government agency when a future firm employee is holds a management post at that agency.
Of particular interest, the financial gains from hiring ex-government officials are notably reduced during periods in which presidential executive orders restrict revolving door movements. Authors Mehmet Ihsan Canayaz, Jose Vicente Martinez and Han N. Ozsoylev note: “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.”
Revolving door employees produce value for hiring firms before, but not during or after employment
The study focused on possible revolving door conflicts of interest including: (i) Conflicts before corporate employment: Government officials may abuse their power while in office to favor a certain company or industry in order to ingratiating themselves with an eye toward future employment. (ii) Conflicts during corporate employment: Former government officials who move to the private sector may influence their former government colleagues to make decisions in a way that favors their new employers. They may possibly use confidential information to help their new employers, for example, in procurement. (iii) Conflicts after corporate employment: Government officials may allow the agenda of their previous corporate employer to influence their government work.
The results show that firms who eventually hire a government official clearly do see benefits during the period that the public official is in office (outperform other firms by almost 7.5%). However, firms who hire revolving door employees coming from government jobs do not see much if any outperformance during the tenure of the ex-public official as an employee. By the same token, private sector firms that see a senior executive leave to take a government position do not see significant benefits during the period the ex-employee is working for the government.
See full study below.