The Role of Stock Ownership by US Members of Congress on the Market for Political Favors
London Business School
February 28, 2011
AFA 2011 Denver Meetings Paper
I examine whether stock ownership by politicians helps to enforce noncontractible quid pro quo relations with firms. The ownership by US Congress members in firms contributing to their election campaigns is higher than in noncontributors. This bias toward contributors depends on the financial incentives of politicians and the relation’s value. Firms with a stronger ownership – contribution association receive more government contracts. The financial gains from these contracts are economically large. When politicians divest stocks, firms discontinue contributions to the politicians, lose future contracts, and perform poorly. Politicians divest the stocks in contributors, but not in noncontributors, in anticipation of retirement.
Number of Pages in PDF File: 66
Keywords: Portfolio choice, Politics of financial markets, Government contracts, Commitment device, Politicians–firms relation, Political connections, Investment by politicians
JEL Classification: D72, G10, G11, G18, G38working papers series
Date posted: March 19, 2010 ; Last revised: August 2, 2013
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