Peering into the Crystal Ball: The Information Content of Legislative Trading

Abstract

This study introduces a new measure of the political risk to which firms are subject. We find that the aggregate equity trading U.S. senators significantly predicts a firm’s future risk and return. This measure possesses industry-relevant information beyond what is contained in existing measures of political risk and uncertainty. We show that aggregated Senatorial trading conveys information about future industry performance more than individual equity transactions. Our findings are robust to alternate model specifications and are economically significant. Our results significantly extend the findings of previous studies on how political risk affects a firm’s performance.

Keywords: information asymmetry, insider trading, legislative activity, political risk

JEL Classification: G12, G14, G28, G32, K22