Stocks and Members of Congress

This weekend 60 Minutes’ aired an excellent piece on members legally trading stocks on insider information. Earlier this year we reviewed some research on this exact topic. The authors find that representatives’ stocks do abnormally well compared to the average American or even business executives. This confirms earlier research on senators’ trading habits. Here is the abstract from the Ziobrowski, Boyd, Cheng, and Ziobrowski article from Business and Politics:

A previous study suggests that U.S. Senators trade common stock with a substantial informational advantage compared to ordinary investors and even corporate insiders. We apply precisely the same methods to test for abnormal returns from the common stock investments of Members of the U.S. House of Representatives. We measure abnormal returns for more than 16,000 common stock transactions made by approximately 300 House delegates from 1985 to 2001. Consistent with the study of Senatorial trading activity, we find stocks purchased by Representatives also earn significant positive abnormal returns (albeit considerably smaller returns). A portfolio that mimics the purchases of House Members beats the market by 55 basis points per month (approximately 6% annually).

Update 11/17: Eggers and Hainmueller find that members’ stock holdings from 2004-2008 underperformed the market by roughly 2-3% annually. This study takes into account members’ stock transactions as well as stock holdings. This makes it a bit more comprehensive than the Ziobrowski article. However, the fact that members underperformed the market doesn’t exactly free them from ethical culpability. The fact members didn’t benefit from their transactions doesn’t change that they potentially acted on insider information.