Capitalizing on Capitol Hill: Informed Trading by Hedge Fund Managers
University of Illinois at Urbana-Champaign - Department of Finance
National University of Singapore, RMI
April 18, 2011
Fifth Singapore International Conference on Finance 2011
AFA 2012 Chicago Meetings Paper
In this paper, we examine the hypothesis that hedge fund managers obtain an informational advantage in securities trading through their connections with lobbyists. Using datasets on hedge fund long-equity holdings and lobbying expenses from 1999 to 2008, we show that hedge funds that are connected to lobbyists tend to trade more heavily in politically sensitive stocks than do non-connected funds. Furthermore, using a difference-in-differences approach, we find that connected hedge funds, relative to non-connected ones, outperform by 1.6 to 2.5 percent per month on their holdings of politically sensitive stocks, relative to their non-political holdings. Our study provides evidence for the ongoing debate about regulatory reform governing informed trading based on private political information.
Number of Pages in PDF File: 51
Keywords: Hedge funds, lobbyists, informed trading, performance, information transfer
JEL Classification: G11, G23, G14working papers series
Date posted: November 13, 2010 ; Last revised: September 28, 2011
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