Elections decrease Financial Regulatory Activity: Evidence from Investment Adviser Disclosures

Abstract

This paper shows that elections decrease regulatory actions against misconduct in the financial industry. In the United States, regulation of financial misconduct is carried out by three types of regulators: federal, state, and self-regulatory. Most state-level financial regulators are directly appointed by state governors. We analyze a new database on regulatory actions covering 49 US states from 1990 until 2019, to assess whether state-level electoral incentives affect regulatory activity. Exploiting exogenous electoral cycles of US gubernatorial elections, we find causal evidence that state-level financial regulators reduce regulatory activity starting five months before gubernatorial election events. This slump occurs even earlier if elections are contested. Federal and self-regulatory regulators do not punish less in response to gubernatorial elections, suggesting a direct link between gubernatorial elections and state regulators. Using data on the average duration of preparation for each case, we show that there is a significant rush to finish regulatory actions up to five months prior to gubernatorial elections. We find no evidence for a catch-up effect after gubernatorial election events. These results underscore the persistence of electoral cycles in financial regulation.