The market reacts to stocks purchased by US senators, with little effect when lawmakers sell stocks
New research in the Strategic Management Journal finds abnormal returns are higher if the senator has direct jurisdiction over the firm.
Peer-Reviewed PublicationStock purchases by U.S. Senate members generate abnormal returns, according to a study of purchases made by the politicians between 2012 and 2020. The findings, published in the Strategic Management Journal, also suggest that abnormal returns are higher if the senator has direct jurisdiction over the firm by way of committee assignments, along with an increase in abnormal returns if the firm is tied to the senator via lobbying-sponsored legislation and political action committee contributions. However, they found little evidence that stocks traded by Congress members outperform the market.
“Contrary to investors’ perception, we find that stocks sold and purchased by senators experienced negative abnormal returns over the six- to 12-month period following the transaction date,” says study co-author Mirzokhidjon Abdurakhmonov, an assistant professor of management at the University of Nebraska-Lincoln. “Also, while the market seems to react to stock purchases by members of Congress, there was little reaction when these politicians sell their stocks.”
Previous studies about Congress members’ stock trades focused on the overall performance of politician-traded stocks, with little attention paid to how investors perceive such trades, prompting Abdurakhmonov and his co-authors to research the topic. What they found was little evidence that stocks traded by Congress members outperform the market — and that the opposite is potentially true. Yes, the market reacts positively to the purchase of stock by a senator, but the researchers’ post-hoc analyses were unable to find a similar effect for the disclosure of stock sales by the senator. This suggests that information about senators’ stock purchases is more valuable to investors than stock sales.
The researchers suggest that to mitigate potential sways in the market caused by politician stock trades, lawmakers' stock holdings should be limited to blind trusts or exchange-traded funds that follow broad stock market indexes and asset classes. And by tying lawmakers' wealth with broad economic indicators of the country, their personal interests would align with national interests. This would increase public trust by reducing the appearance of potential impropriety — as would a ban on trades of stocks that are directly regulated by members of bureaucracy or legislature.
Although firms may not have direct control over if or when a senator invests in a firm, the results suggest that the connection of the firm to the legislator — by way of lobbying the senator's legislative proposals or campaign contributions — does matter. Abdurakhmonov says this makes the case for firms to aim for an expanded breadth of government, because they not only mitigate risks produced by the government, but it helps to generate positive market returns if and when legislators do invest in such firms.
The researchers also found that — while senators were slow to comply with the Stock Trading Act of 2012 — there has been an increase in on-time disclosures: Within the sample time frame studied, most senators disclosed their stock trades within a 36-day window, and more than 90% were reported within the 45-day reporting period.
The Strategic Management Journal, published by the Strategic Management Society, is the world’s leading mass impact journal for research in strategic management.
No comments:
Post a Comment