A few years ago we mentioned a study, “Abnormal Returns from the Common Stock Investments of the U.S. Senate,” finding that U.S. Senators as a group outperformed the market in their stock holdings. The researchers are back now with a similar examination of the U.S. House of Representatives, titled, simply enough, “Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives.” The article appears in the journal Business and Politics.
ABSTRACT: 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).
The authors suggest two possible mechanisms that may explain the market-beating performance, using nonpublic information or voting their portfolio. Members of Congress have access to nonpublic information relevant to the performance of stocks, and may use that information in trading. Alternatively, Members of Congress may “vote their portfolio” and thereby provide a boost to companies held in Congressional portfolios. The two explanations are not mutually exclusive, and of course maybe they’re just lucky.
An article at the Huffington Post drew attention to the result that Democratic members of the House did much better than Republicans did, about 9 percent annual returns above the market compared to 2 percent for the GOP members, and also that members with less seniority did better than members with more seniority.
(HT to Robin Hanson who pointed out the Huffington Post article on the topic.)