Does Industry Employment of Active Regulators Weaken Oversight?

Jonas Heese ()
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Jonas Heese: Harvard Business School, Boston, Massachusetts 02163

Management Science, 2022, vol. 68, issue 12, 9198-9218

Abstract: I study whether industry employment of active regulators weakens oversight. To examine this question, I exploit that the Financial Reporting Enforcement Panel (FREP), the German capital-market regulator responsible for enforcing public firms’ compliance with accounting standards, allows its senior regulators to serve on boards of public firms during their FREP tenure. I find that firms are less likely to face enforcement actions after they appoint active regulators to their board. After such an appointment, firms are more likely to receive a qualified audit opinion, more likely to have an above-normal risk of accounting manipulation, as measured by an F-score greater than one, and exhibit higher income-increasing abnormal accruals. These findings suggest that directorships of active regulators can result in conflicts of interest that weaken oversight.

Keywords: conflict-of-interest policies; directorships; enforcement actions; industry employment; self-regulatory organizations (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:12:p:9198-9218

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