Banks’ Revolving Door Hiring of Former Regulators: Accounting Implications and Beyond

Banks’ revolving door hiring of former regulators is a prevalent phenomenon that generates substantial media coverage and policy discussions. Yet, the consequences of such hiring are underexplored, possibly because of the difficulty in measuring such hiring for a large sample of banks. I propose to collect millions of professional profiles from LinkedIn, the world’s largest professional network website, so that I can identify such hiring for a large sample of U.S. commercial banks. This data allow me to conduct comprehensive analyses on the potential consequences of banks’ revolving door hiring. While I mainly focus on accounting implications in this proposal, the data can be used to study a broader scope of outcomes.

Specifically, I study the impact of revolving door hiring on banks’ loan loss recognition timeliness (LLRT). LLRT captures the extent to which banks account for forwardlooking information when making loan loss provisions. Since the global financial crisis, regulators have emphasized the importance of LLRT in credit loss accounting and standard setters have introduced new accounting standards to promote it. Whether and how revolving door hiring affects banks’ accounting behavior is an empirical question. On the one hand, banks may want to leverage these candidates’ supervisory experience and accounting expertise so that they can better comply with regulatory requirements, resulting in increased LLRT. On the other hand, banks may want to leverage the social connections and knowledge of a former banking regulator to gain favorable treatment and insulate themselves from adverse regulatory actions, resulting in decreased LLRT.

To collaborate the mechanisms, I study three conditions under which the effect of revolving door hiring on LLRT should be stronger: i) when the revolving door hires fulfill accounting-related job functions; ii) when they have extensive experience working at regulatory agencies; and iii) when they have experience working with the bank’s primary regulator. To broaden the scope of the study, I propose some additional analyses that go beyond LLRT. Specifically, I examine the impact of revolving door hiring on loan loss provision validity, reporting opacity, bank risk-taking, and regulatory enforcement actions.

In sum, my proposed research can improve our understanding of how revolving door hiring affects banks’ accounting and other behaviors that are important to the stability of the banking system. The findings are likely to have policy implications such as allowing for evidence-based approach in consideration of whether to encourage/curtail the movement of workers between regulatory agencies and regulated entities.