Negative Trading in Congress

62 Pages Posted: 16 Jul 2024

See all articles by Peter Molk

Peter Molk

University of Florida Levin College of Law

Frank Partnoy

University of California, Berkeley - School of Law

Date Written: July 15, 2024

Abstract

We investigate negative trading, such as short selling, by members of Congress. We find, based on a new comprehensive dataset of trades by members of Congress, that negative trading not only is common, but also is associated with positive abnormal financial returns. Simply put, members of Congress's bets on stock price drops make money. 
In contrast, we do not find a similar association for long positions taken by members of Congress. In other words, there is an asymmetry between "positive" versus "negative" Congressional trading. 
This asymmetry has multiple implications for public policy. Our main message is that proposals to regulate Congressional trading should reflect the empirical evidence that reveals key differences between positive and negative trading, and we show how current approaches fail to do so. Perhaps more controversially, we also argue that, depending on how one balances efficiency against fairness concerns, negative trading by members of Congress could be socially valuable and justify promotion, rather than suppression. Our empirical evidence also raises implications for the optimal disclosure regulation of Congressional trading in different financial instruments, particularly individual stocks versus mutual funds and stock options. Finally, our results support the emerging academic critique of Tobin's Q as an unreliable measure of firm value.

Keywords: insider trading, Congress, fairness, short selling, policy, Tobin's Q

JEL Classification: K22

Suggested Citation

Molk, Peter and Partnoy, Frank, Negative Trading in Congress (July 15, 2024). Indiana Law Journal forthcoming, University of Florida Levin College of Law Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4895427 or http://dx.doi.org/10.2139/ssrn.4895427

Peter Molk (Contact Author)

University of Florida Levin College of Law ( email )

P.O. Box 117625
Gainesville, FL 32611-7625
United States

Frank Partnoy

University of California, Berkeley - School of Law ( email )

215 Law Building
Berkeley, CA 94720-7200
United States

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