Does the Revolving Door Affect the SEC’s Enforcement Outcomes?
Stanford Graduate School of Business
Rutgers Business School
Nanyang Technological University (NTU) - Nanyang Business School
Emory University - Goizueta Business School
March 4, 2014
Rock Center for Corporate Governance at Stanford University Working Paper No. 187
Stanford University Graduate School of Business Research Paper No. 14-14
We investigate the consequences of the “revolving door” for lawyers at the SEC’s enforcement division. If future job opportunities make SEC lawyers exert more enforcement effort to develop and showcase their expertise, then the revolving door phenomenon will promote more aggressive regulatory activity (the “human capital” hypothesis). In contrast, SEC lawyers can relax enforcement efforts in order to develop networking skills and/or curry favor with prospective employers at private law firms (the “rent seeking hypothesis”). We collect data on the career paths of 336 SEC lawyers that span 284 SEC enforcement actions against accounting misrepresentation over the period 1990-2007. We find evidence consistent with the human capital hypothesis. Specifically, enforcement outcomes are more aggressive for lawyers that leave the SEC to join law firms that specialize in defending clients before the SEC. We find no notable difference in enforcement outcomes for lawyers hired by the SEC from private law firms (“inbound revolvers”). Due to data limitations, we are unable to comprehensively analyze every aspect of the revolving door phenomenon, including whether revolving door incentives influence SEC lawyers’ choice of which cases to pursue. Nevertheless, our results provide an important first empirical look into the effects of revolving door incentives on the SEC’s enforcement process.
Number of Pages in PDF File: 61
Keywords: SEC, enforcement, revolving door, financial reporting, lawyers, human capital
JEL Classification: G38, M4working papers series
Date posted: August 7, 2012 ; Last revised: June 12, 2014
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