Study: Defense firms see stocks rise when their execs get hired by the Pentagon

October 1, 2012

For decades — and likely longer — newspapers in Washington have been chronicling the revolving door between jobs in government and businesses. A new president arrives in the White House and starts tapping executives from the private sector for key positions: President Obama, for instance, nominated a lobbyist from the military contractor Raytheon, William J. Lynn III, to be his deputy secretary of defense. Later on, officials and politicians depart the government to go work as lobbyists. 


(J. Scott Applewhite/AP)

But is it possible to quantify how much companies actually benefit from all this influence-peddling? Yes. A new study (pdf) by two Swiss economists looks at the stock market and finds that well-connected firms appear to get a significant boost from the revolving door.

The authors, Simon Luechinger and Christoph Moser, look at what has happened to military contractors whose executives have been tapped for key Defense Department positions over the past six administrations. Not surprisingly, stock prices at those companies tend to leap immediately after the announcement, by an average of 0.84 percent on the second day. "According to the results," the economists write, "investors clearly expect firms to profit from their political connections."

The authors find that the stock bump is larger when executives leave for the top-most Defense Department positions, and unexpected announcements tend to give a bigger boost to a company's stock price (that's what the dashed line shows in the graph above). (The authors also try to see whether this is due to chance, checking on whether the boost tends to be related to other news events about the firms studied or to broader industry trends). What's more, when an executive from a company is nominated and then withdrawn, the firm's stock price tends to sink back down.

The revolving door also works the other way. When firms hire former government officials, they get a stock boost (an average of 0.79 percent and 1.05 percent on the first and second day), albeit these results are statistically less strong. "We find that stock market reactions tend to be higher for nominations to the board of directors and for corporate appointments of former political appointees of a Democratic President," the authors write.

This paper isn't shocking, since previous studies have looked at the value of high-level political connections. A 2010 paper written by Daron Acemoglu found that firms connected to Timothy Geithner in some way got a big market boost after he was nominated as U.S. Treasury secretary. But, note Luechinger and Moser, their paper is one of the first to look more broadly at the revolving door between a government agency and an industry.

The authors do caution, however, that they are not arguing against the revolving door. It's possible that there are sometimes benefits, as well. An executive from a well-connected industry is likely to have expertise in the relevant area. A debate over tightening the ethics rules, they note, would have to look at both the costs and benefits. "But this is unlikely to happen anyway," they add. "Whoever wins the presidential race this time, neither of the candidates campaigned on the promise of closing the revolving door."

Related: Congress's revolving door, in one graph

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