From K Street to Wall Street: Political Connections and Stock Recommendations

Posted: 1 Mar 2014 Last revised: 31 May 2017

Date Written: June 1, 2016

Abstract

In this study, we examine whether sell-side security analysts gain access to value relevant information through political connections. We measure analysts’ political connections based on political contributions at the brokerage house level. We argue that if brokerages are able to obtain private information through their political connections, analysts at politically connected brokerages should issue more profitable stock recommendations, and this increased profitability should be more pronounced for politically sensitive stocks. Our evidence is consistent with these predictions. Analyses of recommendations issued surrounding the Affordable Care Act further support our main inferences. Moreover, our findings hold after we employ numerous tests to address correlated omitted variables and endogeneity. Collectively, these results suggest that brokerages obtain value-relevant, non-public information from their political connections.

Keywords: Security analysts; Stock recommendations; Political connections; Information flow

JEL Classification: G24, G38, G14

Suggested Citation

Christensen, Dane M. and Mikhail, Michael B. and Walther, Beverly R. and Wellman, Laura, From K Street to Wall Street: Political Connections and Stock Recommendations (June 1, 2016). Accounting Review, Vol. 92, Issue No. 3, 2017. Available at SSRN: https://ssrn.com/abstract=2402411 or http://dx.doi.org/10.2139/ssrn.2402411

Dane M. Christensen

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Michael B. Mikhail

University of Illinois at Chicago - College of Business Administration ( email )

601 South Morgan Street
11th Floor
Chicago, IL 60607
United States

Beverly R. Walther

Northwestern University - Department of Accounting Information & Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-467-1595 (Phone)
847-467-1202 (Fax)

Laura Wellman (Contact Author)

Pennsylvania State University ( email )

378 Business Building
University Park, PA 16802
United States
6026225683 (Phone)

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