Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Insider Trading on Capitol Hill: Congressional Democrats Do It Better

Want a good stock tip?

Ask a Congressman. Especially a Democrat.

A new study that looks at all the purchases of stocks by members of the House of Representatives finds that their purchases outperform the market by 6 percent. The “positive abnormal returns” are both “economically large” and “statistically significant,” the study's authors write. (You can download the paper here.)

This probably is not a sign that House members have such unique investment skills that they can consistently outperform the market.

It’s far more likely that they have access to non-public information that allows them to achieve superior returns.

In fact, the outperformance of House members exactly matches that of corporate insiders investing in their companies own stock.

Democrats get better results than Republicans. A portfolio of stocks mimicking the stocks purchased by Democratic House members outperformed the market by 9 percent. The Republican portfolio by just 2 percent.

Congressmen with the least seniority make superior trades to those with more seniority—which is surprising. Ordinarily, we’d think that lawmakers with more seniority would have access to more information on which to trade. The study suggests that this might be due to the fact that the financial positions of many freshman members of Congress is often precarious. Senior lawmakers may be less motivated to engage in insider trading.

For all their stock market prowess, Congressmen aren’t as good investors as Senators. Fewer of them trade—just 15 percent of the House bought stocks, compared to 27 percent of the Senate—and they trade less frequently. The stock purchases of Senators outperform the market by 12 percent a year.

The study, called "Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives" was done by Alan J. Ziobrowski, Georgia State University, James W. Boyd, Lindenwood University, Ping Cheng, Florida Atlantic University, and Brigitte J. Ziobrowski, Augusta State University. It was published in the Journal of Business and Politics.


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