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<p>This study examines whether the revolving-door phenomenon at financial intermediaries, specifically institutions sponsoring initial public offerings (IPOs), affects fraud allegations against their IPO clients in the Chinese market. We find that when sponsor institutions employ former China Securities Regulatory Commission (CSRC) regulators as board members or top managers, the CSRC is less likely to allege fraud against their clients. Evidence shows that this effect is caused more by a reduced probability of fraud detection than by a lower propensity to commit fraud, and that former regulators’ CSRC connections are more likely to drive this effect than their regulation expertise. Additional analyses show that former regulators also help sanctioned clients obtain lighter sanctions. Sponsor institutions benefit from employing former CSRC regulators by charging higher service fees, whereas the former regulators benefit from greater compensation. Finally, we find that while institutional investors see through the revolving-door phenomenon, retail investors do not.</p>

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Revolving door at financial intermediaries: evidence from fraud allegations against IPO clients

  • 期刊论文

  • 发表日期：

    2026年3月3日

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  • Yangyang Chen,
  • Shuping Lin,
  • Jeffrey Ng,
  • Yue Pan

摘要

This study examines whether the revolving-door phenomenon at financial intermediaries, specifically institutions sponsoring initial public offerings (IPOs), affects fraud allegations against their IPO clients in the Chinese market. We find that when sponsor institutions employ former China Securities Regulatory Commission (CSRC) regulators as board members or top managers, the CSRC is less likely to allege fraud against their clients. Evidence shows that this effect is caused more by a reduced probability of fraud detection than by a lower propensity to commit fraud, and that former regulators’ CSRC connections are more likely to drive this effect than their regulation expertise. Additional analyses show that former regulators also help sanctioned clients obtain lighter sanctions. Sponsor institutions benefit from employing former CSRC regulators by charging higher service fees, whereas the former regulators benefit from greater compensation. Finally, we find that while institutional investors see through the revolving-door phenomenon, retail investors do not.