Do Former Civil Servants Affect a Firm’s Value and Credit Spreads?

Abstract

Earlier studies in the literature of politically connected firms and the “revolving door” of government officials to the private sector focused mostly on politicians and high-ranked civil servants. In this paper I comprehensively survey the transition of all ranks of government officials (civil servants and political figures) to the private sector, its determinants and implications on firm’s value and credit spread. For this purpose I exploit a hand collected rich and coherent dataset, of former government officials who were hired by publicly listed firms in Israel in the years 2007–2015. The results show that 60 percent of these firms employed a former government official, and that 9 percent of all directors and executives are former government officials. I find that, inter alia, the higher the regulatory burden imposed on a firm, the higher the likelihood it will hire a former government official. I further find that firm’s value increases following the appointment of former government official to a firm’s management, with no additional increase observed if the appointee was a high-ranked government official. Firm’s credit spread, however, decreases only with the appointment of high-ranked former government official. Both effects are greater if the appointee is the first former government official to be employed by the firm, and decrease with the number of years that passed between the departure of the appointee from her last position in the political system or civil service and the time of her appointment to firm’s board of directors or management. These results highlight the importance of including all ranks of former government officials and their background when testing for the value of political and civil service connections.

Keywords: Revolving door, Former civil servants, Event study, Stock prices, Corporate bonds spreads

JEL Classification: G14, D73, G30