Tags: Politicians | Abnormally | High | Stock | Returns | congress | lawmakers

Members of Congress Found to Get ‘Abnormally High’ Stock Returns

Wednesday, 25 May 2011 02:35 PM

A new study has found that investments held by members of Congress significantly outpace the broader market, raising questions about insider information available to elected officials — but not to ordinary Americans.

The study of stock investments by members of the House of Representatives replicates a previous study of U.S. Senators’ investments with similar results: House members were able to exceed the market’s gains by 55 basis points per month, more than 6 percent a year.

The earlier study on Senators had found that they were able to beat the market by 10 percent, owing in part to their ability to delay or block legislation by filibuster.

(Getty Images photo)
“Overall we find that the common stocks purchased by Members of the U.S. House of Representatives earn statistically significant positive abnormal returns,” the researchers write.

“Our results indicate that Representatives, like Senators, also trade with a substantial information advantage.”

The study, by researchers at four different universities and published in the journal Business and Politics, looked at 16,000 common stock transactions by approximately 300 House members between 1985 and 2001.

Some other findings of note:

• Democrats beat Republicans, earning 9 percent annually over market performance vs. just 2 percent for GOP members of the House. The authors note that, during the study period, Democrats controlled the House for 10 of the 17 years and were “deeply entrenched” in House leadership roles. “When Republicans finally took control in 1995, they arguably had far less experience at handling the reins of power and may therefore have been unable to immediately enjoy all its perquisites,” they write.

• Junior members of the House tended to do better than senior members. It’s “counterintuitive,” the researchers argue, since senior members would be in a better position to command information, but the gap might reflect the fact that senior members are better off financially. “House Members with the least seniority may have fewer opportunities to trade on privileged information, but they may be the most highly motivated to do so when the opportunities arise,” they write.

• House members knew when to buy a stock but, like many typical investors, were less clear on when to sell it. Senators were better at getting out of a trade at the right time, but House members’ investments more often continued to rise well after they were sold, costing them potential gains.

The researchers point out that House members are not required to divest themselves of stocks upon taking office, nor do the rules of Congress require them to recuse themselves in votes in which they might have an investment, at least in terms of common stock holdings.

However, “members of Congress are not permitted to use their official positions for private profit and may not use confidential information obtained in the performance of their government duties for personal gain,” the authors state.

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