Is the Revolving Door of Washington a Back Door to Government Contracts and Excess Returns?

Abstract

The movement of individuals between government positions and private sector employment influences federal government contracting decisions and stock market returns. Firms that will soon hire government officials receive valuable government contracts, beat consensus earnings forecasts, and outperform in the stock market. Managers of these firms can successfully forecast future firm earnings that come as a surprise to equity analysts. These findings are consistent with an implicit quid pro quo relationship between some government officials and firms. We run a battery of robustness checks to mitigate endogeneity concerns and address other possible explanations.

Keywords: Corporate political connections, government contracts, regulatory capture, revolving door

JEL Classification: D73, G12, G18, L51