Abnormal Stock Market Returns for Members of the House of Representatives

Michael Giberson

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.)

3 thoughts on “Abnormal Stock Market Returns for Members of the House of Representatives

  1. While most of this is not particularly surprising to anyone with a realistic (i.e. low) opinion of the morals of our political representatives, I did find the last two statistics: that Dems do better than GOPers, and new members do better than senior members surprising.

    I have a theory that might explain both of these: politicians who are less beholden to industry are better able to see the trends for future legislation, and are better able to exploit this knowledge in the stock market. They may also be better able to vote their portfolios, rather than voting for their financial backers.

    Dems get less money from industry, as do new congressmen… so my guess is that Dems and freshmen representatives are also able to more objectively assess the rends of future legislation, and profit from it.

    In any case, if there were ever a reason to promote index funds, this seems to be one of them. It seems so ironic that politicians who spend so much time attacking speculators are some of the most effective speculators around.

    Why can’t I invest in a hedge fund run by a 1st year Democratic Senate freshman? That might actually be worth two and twenty.

  2. Re: “a hedge fund run by a 1st year Democratic Senate freshman”

    Seems sure to be a winner.

    Much more cynical than your theory: I was wondering whether freshmen members of Congress are targeted for receipt of helpful investment advice by members of industry because they are seen as available and perhaps vulnerable to friendly persuasion. More established members of Congress have already been “persuaded,” i.e., made their commitments, so there is less return in the way of favors to anyone trying to offer established members helpful investment advice.

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