Trading on Private Information: Evidence from Members of Congress

Abstract

This paper investigates whether members of Congress use private information in their stock transactions. We analyze 61,998 congressional common stock transactions over the 2004-2010 period, and find that the buy-minus-sell portfolios of powerful Republicans outperform the market with abnormal returns exceeding 32% under a one-week holding period. These abnormal returns persist under both Democratic- and Republican-controlled Congresses. Furthermore, the portfolios of powerful Republicans with less trading experience (i.e., unsophisticated) outperform those of sophisticated powerful Republicans. Also, the advisor-assisted and self-managed portfolios of unsophisticated powerful Republicans both earn abnormal returns. Our results imply that the performance of congressional portfolios is mostly driven by private information that politicians acquire from sources inside and outside of Congress, based on their power and party membership.

Keywords: private information, informed trading, congressional trading, STOCK Act, Congress

JEL Classification: G12, G14, G18