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The Role of Stock Ownership by US Members of Congress on the Market for Political Favors

81 Pages Posted: 19 Mar 2010 Last revised: 30 Jan 2014

Ahmed Tahoun

London Business School

Date Written: February 28, 2011

Abstract

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.

Keywords: Portfolio choice; Politics of financial markets; Government contracts; Politicians–firms relation; Investment by politicians

JEL Classification: D72, G10, G11, G18, G38

Suggested Citation

Tahoun, Ahmed, The Role of Stock Ownership by US Members of Congress on the Market for Political Favors (February 28, 2011). AFA 2011 Denver Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1571974 or http://dx.doi.org/10.2139/ssrn.1571974

Ahmed Tahoun (Contact Author)

London Business School ( email )

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Regent's Park
London, London NW1 4SA
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