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
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: Suggested Citation