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We investigate the effects of hiring former officials of the China Securities Regulatory Commission (CSRC) on a firm’s misconduct likelihood. Using the CSRC’s enforcement actions data from 2008 to 2015, we find that revolving-door directors significantly increase a firm’s ex ante misconduct likelihood. Further analysis shows that the effect of revolving-door directors is more significant in firms with higher administrative ranks for revolving-door directors and firms without financial expertise. Our findings are consistent with the “regulation circumvention” hypothesis, which suggests that revolving-door directors may help regulated firms to game the system after they join the regulated firms. Moreover, to establish causality, we adopt the number of direct flights from Beijing to the firm’s headquarters as the instrument variable. Our results are robust to a variety of model specifications.

Why a Firm Hires Former Regulators: Governance Improvement or Regulation Circumvention?