Does the Revolving Door Affect the SEC’s Enforcement Outcomes?

We provide empirical evidence on the consequences of the “revolving door” phenomenon at the SEC. If future job opportunities make SEC lawyers exert more enforcement effort to 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 curry favor with prospective employers in the private sector (the “rent seeking” hypothesis”). We collect data on the career paths of 336 SEC lawyers that span 284 SEC enforcement actions against fraudulent financial reporting over the period 1990-2007. We find evidence consistent with the human capital hypothesis. Specifically, the intensity of enforcement efforts, proxied by the fraction of losses collected as damages, the likelihood of criminal proceedings and the likelihood of naming the CEO as a defendant, are higher when the SEC lawyer leaves to join law firms that defend clients charged by the SEC. Our evidence is thus inconsistent with popular concerns that revolving doors undermine the SEC’s enforcement efforts. *Corresponding author. We would like to thank Jonathan Karpoff, Scott Lee and Gerald Martin for graciously sharing their SEC enforcement data. We thank Scott Lee, Zoe-Vonna Palmrose, Srini Sankaraguruswamy, Michael Smallberg of POGO, Jun Yang and seminar participants at ALEA Meetings held at Stanford University, Fordham University, Miami University, National University of Singapore, University of Florida, Texas A&M University and Delaware University for their comments. We are grateful for financial support from the Foster School of Business, Nanyang Business School, Goizueta Business School and the Whitcomb Center at Rutgers Business School.