Profiting from Connections: Do Politicians Receive Stock Tips from Brokerage Houses?

Abstract

This study investigates whether brokerage houses appear to provide stock tips to politicians. Our results indicate that trades by politicians who are politically connected to the brokerage house where the trade is executed are more profitable in a short window. Our estimates suggest that these connected trades earn an incremental 0.3% over a five-day window relative to the politician’s average trade profitability, translating into an incremental $3,411 in annual trading profits. We provide additional support for our inferences by investigating the frequency and differential profitability of politicians’ trades immediately before the brokerage house issues a revised recommendation, as well as during a period when Goldman, Sachs & Co. was sanctioned for providing stock tips to high priority clients. Additional tests suggest that brokerages may provide stock tips to politicians in exchange for favorable legislative outcomes or value-relevant political information.

Keywords: Congressional trading; Political connections; Information exchange; Security analysts

JEL Classification: G24, G38, G14