Political Capital: Corporate Connections and Stock Investments in the U.S. Congress, 2004-2008

Abstract:     
A large political science literature has examined how political exchanges between legislators and firms are reflected in campaign contributions, corporate lobbying, and corporate directorships. In this paper we extend this literature by studying the equity holdings of members of Congress. We synthesize existing theories of political exchange to derive a set of testable predictions about how political relationships between legislators and firms shape legislators’ portfolio decisions and performance. Using data from the 2004-2008 period, we show that members of Congress disproportionately hold stock in local companies and campaign contributors; we also show that their investments in these firms outperform the rest of their portfolios. Members' investments in local companies are their most lucrative, beating the market by about 3% annually, with even higher returns for investments in local companies that also contribute to the member or lobby her committees. The findings are consistent with the view that politicians choose their investments partly to solidify political relationships with firms and partly to capitalize on information they learn in the course of interacting with firms.

Number of Pages in PDF File: 46

Keywords: political exchange, Congress, legislatures, political economy

JEL Classification: G10, G11

working papers series