Returns on Hiring Public Officials

If you think nothing is impossible, try slamming the revolving door of Washington. Despite widespread frustrations, it continues to shuffle employees between government and corporate jobs, and it’s not expected to stop spinning any time soon.

Many on the street eye senior-level government-to-corporate career transitions with suspicion. A prime example is the case of Darleen Druyun. Druyun, who oversaw the management of weapons acquisitions program for the U.S. Air Force, joined Boeing in 2003 as the Deputy General Manager for Missile Defense Systems. Subsequent disclosures revealed that she was negotiating the terms of her Boeing employment while she was handling a proposal to lease tankers from Boeing. The proposal was more costly than purchasing the tankers outright.

Such examples led Barack Obama, as a presidential candidate in 2007, to declare that he as chief executive would “make it absolutely clear that working in an Obama administration is not about serving your former employer, your future employer, or your bank account. It’s about serving your country, and that’s what comes first.”[1]

In a recent study, we examine whether firms on the corporate side of the revolving door of Washington benefit from the situation. We find that the portfolio of firms in which current public officials become future employees outperforms the remaining firms by a highly statistically significant 4.83% to 10.22% per year, in the three-year period immediately preceding the hiring.[2] The outperformance peaks immediately before public officials join their corporate employers, and it vanishes once officials switch to the corporate side. Also, the outperformance is stronger the higher the number of public officials to be hired relative to the size of the firm.

To show that this outperformance is driven by hiring of public officials rather than the other way around, we run further tests. The reverse causality argument here is that firms which performed well in the recent past may be hiring more public officials as they can afford to do so. To assess the validity of this argument, we match the firms that employ officials to a control group of firms that feature similar characteristics in number of employees, change in the number of employees, market capitalization, book-to-market ratio and industry group. We find that the firms employing public officials significantly outperform the control group of matched firms, which is inconsistent with the reverse causality reasoning.

We also provide evidence on the underlying economic mechanism that drives the stock market return outperformance. We show that firms receive more valuable government contracts from a government agency when a future firm employee is holding a post at that agency. Similar to our findings on return outperformance, government contract allocations peak immediately before the hiring of public officials, and they begin to vanish after these officials start working at the firms. Also, government contract allocations attributable to hirings of public officials are significantly lower in value during periods in which presidential executive orders restrict revolving door movements.

Taken together, our findings lend empirical support to the hypothesis that there is a quid pro quo relationship between some public officials and corporations: some public officials may be using their power while in office to favor potential future corporate employers. On the practical side, our findings indicate that the presidential executive orders, which restricted revolving door movements, were effective in curbing some of the conflicts of interest.

Of course, we cannot rule out the potential deterrent effect that overly restrictive provisions on revolving door movements will have upon seeking and retaining talent for government service. Also, such restrictions may isolate the government from private sector concerns and deprive it of private sector experience. However, at least for government contract allocations, our study highlights the need to monitor, and perhaps, reform the institutional incentives surrounding revolving door movements so that public officials act in the public interest. It also highlights the need for a better and deeper understanding of the formal and informal relationships between governments and firms.


[1] See Jeff Zeleny, Obama says new rules would guide his administration,” New York Times (Jun. 23, 2007). Available from

[2] The exact outperformance figure depends on portfolio weighting methodology and risk adjustment.

Mehmet I. Canayaz is Doctoral Candidate at Said Business School, University of Oxford. Jose V. Martinez is Assistant Professor of Finance at School of Business, University of Connecticut. Han N. Ozsoylev is Assistant Professor of Economics and Finance at Koc University and University Lecturer in Financial Economics at Said Business School, University of Oxford. This post is based on their recent article entitled “Is the revolving door of Washington a back door to excess corporate returns?” which is available here.

1 Comment

  1. government jobs

    In a market, we examine whether firms on the corporate side of the revolving. We find that the portfolio of firms in which current public officials become future employees outperforms the remaining.

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