Members of Congress have Better Stocks Than You

Congress has had its share of financial, fundraising, and pork-barrel scandals. Well, add this to the mix. There is an interesting article in the Business and Politics Journal, by Ziobrowski, Boyd, Cheng, and Ziobrowski, on members’ stock returns. There are some interesting, though not surprising findings, concluding with: “we find that stocks purchased by Members of the U.S. House of Representatives earn statistically significant positive abnormal returns.” In other words, members of Congress perform far better in the stock market than the average citizen. The authors attribute this to members’ informational advantages. Because members have access to non-public financial information, the authors conclude that they are able to leverage this information to benefit financially. The study supports previous research done on the Senate. Although, they find that Senators tend to out perform Representatives on their returns.

Of the many findings, one caught my eye. The results indicate that freshman members do much better financially than their senior counterparts. The authors report that senior members “show no indication of information advantage.” This is an interesting because it is exactly the opposite of what we would expect. Senior members hold higher ranks in committees and subcommittees, and therefore privileged to more information. They tend to have larger social networks with greater access to multiple strands of information. On the other hand, members serving less than 6-years in the House severely outperform the market. In fact, this group of legislators seems to drive the findings. The authors stipulate that freshmen face precarious reelections, and therefore, are the most likely to employ their informational advantages. In other words, because freshmen are less likely than senior members to be reelected, they will accumulate personal wealth to boost their chances in the upcoming election. This seems plausible but it isn’t a clear-cut conclusion. Incumbents are the least likely to use their own personal finances to run a campaign. Since 1984, on average less than 1% of House incumbents used personal finances to fund their campaigns. And in only three elections during this period did that percentage reach higher than 1% (2% in ’84, ’86, and ’90). Of course, further analysis should look into whether this stat is even distributed across the membership or concentrated in freshmen or senior members.

Similarly, the study would benefit by controlling for committee jurisdictions. Information does not flow evenly across Congress. Not all members of Congress command the same amount, or even type, of information. For example, committee members on the Energy and Commerce Committee will have much more insight on oil prices than members on the Judiciary Committee. This would help specify whether members were using their policy expertise and informational advantages to specifically inform their trading strategies.

Regardless, it’s an interesting study. It does note that not all members actively trade stock. But examining out how members organize their stock portfolios may give insight into how (and what) information flows through Congress.

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About Joshua Huder

http://gai.georgetown.edu/joshua-c-huder/
This entry was posted in Congressional Absurdity, Electoral Institutions. Bookmark the permalink.

3 Responses to Members of Congress have Better Stocks Than You

  1. This was an interesting study. Coming from NYC many representatives have ties to Wall Street who donate to their campaigns. There is always a line to be drawn, but you always wonder who treads too close.

  2. Joshua Huder says:

    Yeah, and that is the struggle. Where is the line? This study obvious says something significant. However, at this point, it’s just unethical behavior. It’s not unethical by congressional standards (at least, not to my knowledge). Ethics violations have generally fallen along the lines of non-competitive contracts, use of PAC and campaign funds, and the House banking scandals. It’ll be interesting if they ever make a move to include this kind of violation in their ethics rules (it may already be in there, but I haven’t heard of it).

  3. Pingback: Stocks and Members of Congress | Rule22

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