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Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives

Submitted by Roanman on Mon, 11/14/2011 - 05:41


In 2004 Alan J. Ziobrowski et al published a study titled “Abnormal Returns from the Common Stock Investments of the United States Senate which confirmed substantial market outperformance of investments made by members of United States Senate." Last week, Ziobrowski et al published a subsequent study titled Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives which finds as follows:


We find that stocks purchased by Members of the U.S. House of Representatives earn statistically significant positive abnormal returns. The returns outperform the market by 55 basis points per month (over 6% annually). As additional evidence of information advantage, the trade-weighted portfolio of purchased stocks significantly outperforms the equal-weighted portfolio indicating that Representatives invested much larger amounts in those stocks that performed best. The regression coefficients also suggest that House Members favor the common stocks of smaller growth companies with slightly above-average risk.


In sum, the findings from this study of the U.S. House of Representatives’ common stock transactions are generally supportive of the previous study of the U.S. Senate. We find strong evidence that Members of the House have some type of nonpublic information which they use for personal gain. That having been said, abnormal returns earned by Members of the House are substantially smaller than those earned by Senators during approximately the same time period. These smaller returns are due presumably to less influence and power held by the individual Members. The nature and source or sources of information is unknown, but clearly further research is warranted. We recommend that congressional committees should be studied for abnormal returns and indications that members of those committees may favor stocks in industries their committees oversee. Abnormal returns associated with the common stocks of specific industries or companies should be investigated for patterns of potential misconduct. We suggest the examination of the relationships between campaign contributions, common stock acquisitions, and abnormal returns.


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