'Trading' Political Favors: Evidence from the Impact of the STOCK Act

43 Pages Posted: 19 Apr 2016 Last revised: 6 Sep 2019

See all articles by Ruidi Huang

Ruidi Huang

Southern Methodist University (SMU) - Finance Department

Yuhai Xuan

University of California, Irvine - Paul Merage School of Business

Date Written: June 2019

Abstract

This paper demonstrates the tacit benefits that accrue to both politicians and the firms to which they are connected through stock ownership. Specifically, we show strong evidence that politicians use private information and political favors for financial gains from stock investments in their personal portfolios, and that these favors have a real impact on the value and economic outcomes of the firms in which they invest. To do so, we assemble the stock ownership and trading data for all members of the U. S. Congress from 2010 to 2013 and use the passage of the Stop Trading on Congressional Knowledge (STOCK) Act in 2012 as an experiment to examine changes in politicians' trading performance as well as in firm value and outcomes. We find that prior to the STOCK Act, members of the Congress earn significant abnormal returns on their stock trades, and an increase in their holdings of a firm's stock positively predicts the firm's likelihood of being acquired as well as its revenue and earnings surprises. After the passage of the Act, politicians exhibit no such informational advantage in trading or outperformance. On the firms' side, we show that companies with politician ownership on average lose 1.4% in value during the three-day window around the Act's passage, while firms not owned by politicians experience no abnormal returns. Correspondingly, after the Act's passage, these politician-owned firms lose a significant amount of procurement contracts and government grants and become less likely to be selected by the government into high-profile trade missions compared to during the pre-Act period. We find that these mutual benefits are particularly pronounced for politicians who are powerful and firms that are politically active.

Suggested Citation

Huang, Ruidi and Xuan, Yuhai, 'Trading' Political Favors: Evidence from the Impact of the STOCK Act (June 2019). Available at SSRN: https://ssrn.com/abstract=2765876 or http://dx.doi.org/10.2139/ssrn.2765876

Ruidi Huang

Southern Methodist University (SMU) - Finance Department ( email )

United States

Yuhai Xuan (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

4291 Pereira Drive
Irvine, CA California 92697-3125
United States

HOME PAGE: http://yuhai.merage.uci.edu/

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