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PhD_Thesis_Sepehr_Roudini_Final2.69 MB
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Dissertation
Government and corporate finance: analyzing the impact of regulatory agencies, political partisanship, and the revolving door on firms and financial transparency
University of Iowa
Doctor of Philosophy (PhD), University of Iowa
Summer 2024
DOI: 10.25820/etd.007619
Abstract
My thesis examines three aspects of corporate finance and government interactions. The first chapter explores how regulatory agencies' activities impact firm performance by developing an Agency Activity Index (AAI) for four major federal agencies (EPA, FDA, OSHA, and SEC). The second chapter investigates how political partisanship affects equity analysts' careers, showing that political misalignment can impede career progression and affect stock coverage quality. The third chapter studies the "revolving door" phenomenon between the FDA and pharmaceutical firms, demonstrating that hiring former FDA employees boosts drug approval rates and innovation.
In Chapter 1 titled “Federal Government Agencies and Corporate Performance” , we study the influence of regulatory agencies’ activities on firm performance. We eschew both firm-centric language about such activities as well as narrow focus on particular individual components of these activities. Instead, we build a broad measure of activity from the regulatory agency perspective. Using Exploratory Factor Analysis (EFA) we combine six agency-perspective variables, including actions, budget variables, and regulation-verbiage (from the Code of Federal Regulations) into a single annual Agency Activity Index (AAI). Constructing this measure separately for each of four major agencies (EPA, FDA, OSHA and SEC), we find stronger agency activity is associated with lower firm operating performance. Greater firm exposure to the agency strengthens the relationship. Firm-specific violations imposed (from Violation Tracker) are also associated with weaker firm performance. Finally, we conduct several event studies to underline our results. The passages of SOX and Dodd-Frank associate with worse CARs among more-exposed firms, while the recent Supreme Court “Chevron-doctrine” hearing that potentially limits agency influence associated with positive CARs among most of these same firms.
In Chapter 2 titled “Political Partisanship, Analyst Career, and Corporate Transparency” , we study whether analysts’ careers can be affected by political misalignment between analysts and management. Specifically, the paper examines whether partisan misalignment between the equity analysts and the executives of the followed firms affects analysts’ job separations and the level of the company’s stock information asymmetry. Using data on equity analysts covering US firms between 2004 and 2020, our findings highlight political polarization as an obstacle to analysts’ career advancement. Importantly, this effect is not attributable to analyst underperformance (forecast accuracy), but is likely rooted in how their political misalignment and behavior are perceived by management. Our study differentiates itself from previous research on partisan bias (Jiang, Kumar and Law 2016) by controlling for analyst political affiliations and focusing on the alignment or misalignment of beliefs between analysts and CEOs.
Chapter 3 titled “FDA-Firm Revolving Door and Its Effects on Drug Approval Rates and Pharmaceutical Innovation” explores the FDA-Firm revolving door phenomenon where reviewers and directors of the FDA are often hired (later) by the firms they enforce. In this study, I investigate how this revolving door phenomenon benefits the hiring firm ex-post. I find that when pharmaceutical companies hire former FDA employees, the rate of drug approvals increases which in turn raises firm value. When the former revolving door employee held higher-ranked executive position, the effect is more pronounced. Robustness tests within a subset of larger firms, and controlling for variables that could drive firm drug approval - R&D, capital expenditures, leverage and ROA - do not change my results. I find no evidence that the drug quality of firms hiring former FDA employees is negatively affected, as evidenced by lack of FDA recalls. This suggests that the revolving door effect operates through the channels of knowledge and efficiency, rather than relying on personal favors or compromised drug safety. Consistent with this hypothesis, I find evidence of an uptick in innovation output for firms employing former FDA personnel.
Details
- Title: Subtitle
- Government and corporate finance: analyzing the impact of regulatory agencies, political partisanship, and the revolving door on firms and financial transparency
- Creators
- Sepehr Roudini
- Contributors
- Jon Garfinkel (Advisor)Dain Donelson (Committee Member)Cameron Ellis (Committee Member)Erik Lie (Committee Member)Jiajie Xu (Committee Member)
- Resource Type
- Dissertation
- Degree Awarded
- Doctor of Philosophy (PhD), University of Iowa
- Degree in
- Business Administration (Finance)
- Date degree season
- Summer 2024
- Publisher
- University of Iowa
- DOI
- 10.25820/etd.007619
- Number of pages
- xiv, 157 pages
- Copyright
- Copyright 2024 Sepehr Roudini
- Language
- English
- Date submitted
- 07/12/2024
- Description illustrations
- Illustrations, tables, graphs
- Description bibliographic
- Includes bibliographical references.
- Public Abstract (ETD)
- My thesis examines the intersection of government and corporate finance through three key studies. The first chapter investigates how regulatory agencies' activities impact firm performance by developing an Agency Activity Index (AAI) for four major federal agencies: the EPA, FDA, OSHA, and SEC. My findings show that higher levels of agency activity (regulation and enforcement) are associated with lower firm operating performance, especially for firms heavily exposed to these agencies. This negative impact is also reflected in the stock market, where significant regulatory changes, such as Sarbanes-Oxley, cause stock prices to drop for these firms. This chapter investigates the impact of political polarization on the careers of equity analysts. It reveals that analysts whose political views diverge from those of the executives at the companies they cover are likely to experience career setbacks, which interestingly, are not due to their performance levels. Performance comparisons show no significant differences between misaligned and non-misaligned analysts. Setbacks are more severe when analysts' employers, typically brokerage houses, have financial ties to the firms they cover, indicating political disagreements impact careers more than performance metrics. Politically misaligned analysts often provide more thorough analyses, improving firm information quality. The third chapter studies the "revolving door" phenomenon between the FDA and pharmaceutical companies. My research shows that hiring former FDA employees boosts drug approval rates and innovation within these firms. This benefit is particularly strong when the hired individuals held high-ranking positions at the FDA. Importantly, this higher approval rate is without compromising drug quality, as evidenced by the lack of increased drug recalls. Instead, former FDA employees bring valuable knowledge and efficiency, enhancing the firms' ability to navigate regulations and innovate effectively.
- Academic Unit
- Tippie College of Business
- Record Identifier
- 9984698053902771
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