Abnormal Stock Returns for Members of the U.S. House of Representatives
The stock market is often compared to a casino — the game involves skill, of course, but chance plays a significant role. Inside knowledge can shift the odds, however, particularly when it’s held by just a few players.
A 2011 study published in the journal Business and Politics, “Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives” (PDF), looks at the performance of stocks purchased by Congressmen to see if they perform better than the market as a whole. The researchers, based at Georgia State University, Lindenwood University, Florida Atlantic University and Augusta State University, were following up on an earlier study that looked at the stock market returns enjoyed by U.S. senators.
Members of the House are allowed to trade common stocks essentially without restrictions, and aren’t required to recuse themselves when voting on matters that could affect the values of their holdings. The new study looked at the stock transactions of approximately 300 Congressmen from 1985 to 2001, more than 16,000 in all.
The researchers found that:
- Over the period studied, House members’ stocks earned “significant positive abnormal returns.” A portfolio based on Representatives’ purchases beat the market by 55 basis points per month, the equivalent of approximately 6% annually.
- Stocks purchased by Democratic Representatives significantly outperform stocks purchased by Republican Representatives.
- Seniority played a role in stock performance, but not in the sense that one might expect: Stocks of the least-senior Representatives performed significantly better than those with the most seniority.
The researchers write, “We find strong evidence that Members of the House have some type of nonpublic information which they use for personal gain.” Consequently, “abnormal returns associated with the common stocks of specific industries or companies should be investigated for patterns of potential misconduct.” In addition, they recommend that similar studies be performed on members of the Executive and Judicial branches of federal government.
Authors’ earlier study, “Abnormal Returns from the Common Stock Investments of the U.S. Senate” (PDF), looked at returns from stock market investments of U.S. Senators. It found that over the study period of 1993 to 1998, a portfolio based on senators’ purchases beat the market by 85 basis points per month, or approximately 10% per year. In the new study, the authors theorized that senators’ stocks outperformed those of representatives because, being one out of 100 rather than one of 435, the former have greater proportional power.
Tags: law, ethics
Note to instructor: The suggested assignments are designed for flexibility. They can be used in whole or part and can be adapted to a particular task -- for example, the newswriting assignments could be applied to the writing of the headline, the lead, the nut graph or the full story. Material from the assignments could also be combined with other material, for example, in the writing of a background, feature or local-angle story.
- Summarize the study in fewer than 40 words.
- Express the study's key term(s) in language a lay audience can understand.
- Evaluate the study's limitations. (For example: Do the results conflict with those of other reliable studies? Are there weaknesses in the study's data or research design?)
Read the study-related New York Times article titled "Not-So-Representative Investors."
- Reporter's use of the study: Evaluate what the reporter chose to include and exclude from the study. Would the audience have acquired a clear understanding of the study's findings and limits from this article?
- Reporter's use of other material: Assess the material in the article that is not derived from the study. (for example: Does the reporter place the study in the context of other research and to what effect? Does the reporter include reactions to the study from other researchers or interested parties [e.g., political groups business leaders, or community members] and are their credentials or possible biases made clear?)
- Write a lead (or headline or nut graph) based on the study.
- Spend 60 minutes exploring the issue by accessing sources of information other than the study. Write a lead (or headline or nut graph) based on the study but informed by the new information. Does the new information significantly change what one would write based on the study alone?
- Interview two sources with a stake in or knowledge of the issue. Be prepared to provide them with a short summary of the study in order to get their response to it. Write a 400-word article about the study incorporating material from the interviews.
- Spend additional time exploring the issue and then write a 1,200-word background article, focusing on major aspects of the issue.