Do politicians put their money where their mouths are? Actually, yes

 
(Photo by Rick Tap on Unsplash.)
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June 12, 2019

Policies and positions can shift over time. But when it comes to where America’s legislators invest their personal money, turns out they stick pretty firmly to their ideological ground, according to research newly published in Management Science.

Looking at data from 2004 to 2012 on U.S. Congress members’ holdings and trades, the authors find “robust evidence” that legislators “invest in a manner consistent with their political beliefs.”

“We looked even within members of the Democratic Party and found more liberal members invested differently than less liberal, and more conservative Republicans invest differently than more moderate members,” says Elon University Assistant Professor of Finance Adam Aiken, who co-authored the paper with Jesse Ellis and Minjeong Kang. “I think that is probably our biggest contribution — and the fact that moderate Democrats and Republicans invest fairly similarly.”

Exploring ideology on a continuum

Being called a hypocrite is a job hazard for any politician.

U.S. Senate Majority Leader Mitch McConnell was accused of hypocrisy in late May when he said he would push a vote to fill a hypothetical Supreme Court vacancy, after refusing in 2016 to allow a vote on President Barack Obama’s nominee, Merrick Garland. On the other side of the aisle, Senate Minority Leader Chuck Schumer has been accused of hypocrisy for supposedly holding up executive branch nominees.

The authors used politicians’ investment information that the Center for Responsive Politics collects based on financial disclosures required by the Ethics in Government Act of 1978. To measure political leanings, the authors turned to conservative-liberal scores tracked by Jeffrey Lewis, a political science professor at UCLA. These scores allowed the authors to capture politicians’ relative conservativeness or liberalness, rather than simply breaking them up into Democrats and Republicans.

How ideology relates to socially responsible investing

The market for socially responsible investing, or SRI, developed over recent decades because some investors wanted to back firms that follow practices — such as environmental responsibility — that are a net good for society.

For example, investors who follow SRI principles often choose not to invest in companies that rely on burning fossil fuels. The SRI market has grown from $639 billion in assets in 1994 to $12 trillion in 2017, according to The Forum for Sustainable and Responsible Investment, an SRI advocacy group.

The authors created SRI rankings based on the Domini Social Index, which tracks the financial performance of socially responsible firms. The authors rank firms from more-to-less socially responsible across these categories: community involvement, corporate governance, diversity, employee relations, environmental record, human rights and product quality.

“We find robust evidence that more liberal members invest more in socially responsible firms, and in particular, those firms with a strong track record with respect to diversity, employee relations, and environmental protection,” the authors write.

Politicians, though, are a unique group of investors. Their jobs are contingent upon public elections and there is a chance that their investment patterns could reflect public personas built to garner votes, rather than their actual beliefs — but that’s not what the authors found.

“We test for other things where they could be trying to signal to voters about how maybe they don’t actually think [what they say they think] and they’re trying to trick voters, but that doesn’t seem to be the case,” Aiken says. “One example is, when they’re up for their last election, when they don’t run again, they don’t seem to change their portfolios, so this does seem to be what they actually believe.”

Here are a few more topline findings:

  • Legislators interested in environmental or labor issues — by virtue of their committee assignments and scores from special interest groups — do, in fact, favor socially responsible investments that promote environmental and labor concerns. “I would say that’s probably the strongest finding,” Aiken says.
  • The association between SRI and ideology is about the same for members who are moderate — center-right or center-left. At the ideological extremes, there is less of an association between conservative ideology and SRI, and there is more of an association between liberal ideology and SRI.
  • Legislators from the same state and in the same chamber — the House or Senate — had significantly similar portfolios, suggesting that “geographic proximity and information sharing within a group contribute to similar portfolios,” the authors write.

Quid-pro-quo: an affliction for moderates?

Finally, the authors replicate past research exploring stock ownership and political favors. They find that legislators on the political extremes are less likely to invest in ways that could suggest a quid-pro-quo, such as investing in firms that have contributed to their campaigns.

“When Congress members receive campaign contributions, they do own that stock more but it is really moderate members of Congress who do that, suggesting that moderates are doing a little more quid-pro-quo or thinking about their lobbyist career afterwards,” Aiken says.

 

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Citation: Aiken, Adam L.; Ellis, Jesse A.; Kang, Minjeong. "Do Politicians 'Put Their Money Where Their Mouth Is?' Ideology and Portfolio Choice," Management Science, June 2019, doi.org/10.1287/mnsc.2018.3175