Abnormal returns from joining Congress? Evidence from new members

Joshua Hall, Serkan Karadas and Minh Tam Tammy Schlosky

Journal of Financial Economic Policy, 2017, vol. 9, issue 4, 450-474

Abstract: Purpose - Congress passed the Stop Trading on Congressional Knowledge (STOCK) Act of 2012, vesting the Securities and Exchange Commission with the clear legal authority to prosecute members of Congress (politicians) if they engage in insider trading. This paper aims to investigate whether members of Congress are informed traders even before they get elected to Congress, and thus helps assess whether the STOCK Act was a necessary piece of legislation. Design/methodology/approach - This study compares the performance of politicians’ portfolios before and after they are elected to Congress using data from the 2004-2010 period. The authors use an event-study method to construct transactions-based calendar-time portfolios and use standard asset pricing models including capital asset pricing model (CAPM) to determine whether these portfolios earn abnormal returns (i.e. outperform the market). Findings - The authors find weak and inconsistent evidence of abnormal returns in politicians’ portfolios that precede their election. They also find that it takes two consecutive terms in Congress for members to start making informed trades that earn themselves abnormal returns. However, these abnormal returns only accrue to those who serve on powerful committees. Research limitations/implications - The results in this paper provide support for the STOCK Act of 2012 by showing that members of Congress become informed traders while they serve in Congress. However, these results do not imply any wrongdoing for members of Congress, because the paper uses the pre-STOCK Act data (2004-2010 period). Originality/value - This study is the first academic work that compares politicians’ portfolios before and after they get elected.

Keywords: Financial economics; Fiscal policies and behaviour of economic agents (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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Working Paper: Abnormal Returns from Joining Congress? Evidence from New Members (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-12-2016-0095

DOI: 10.1108/JFEP-12-2016-0095

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