Political Capital: Corporate Connections and Stock Investments in the U.S. Congress, 2004-2008
London School of Economics
Stanford University - Department of Political Science; Stanford Graduate School of Business
Quarterly Journal of Political Science (2014, Forthcoming)
Formerly: MIT Political Science Department Research Paper No. 2012-26
Recent research suggests that, public perceptions notwithstanding, members of Congress are rather mediocre investors. Why do the consummate political insiders fail to profit as investors? We consider various explanations that pertain to members' political relationships to public firms. We show that members of Congress invest disproportionately in local firms and campaign contributors, which suggests that overall underperformance cannot be explained by the absence of political considerations in members' portfolio decisions. These connected investments (and particularly local investments) generally outperform members' other investments, which suggests that poor performance is not explained by an excessive political skew in members' portfolios. It appears that members of Congress earn poor investing returns primarily because their non-connected investments perform poorly, perhaps due to the usual failings of individual investors; a combination of political and financial considerations may explain why they do not make more extensive use of their political advantages as investors.
Number of Pages in PDF File: 43
Keywords: political exchange, Congress, legislatures, political economy
JEL Classification: G10, G11
Date posted: December 2, 2011 ; Last revised: January 29, 2014
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