Informed Trading at Capitol Hill: Evidence from Congressional Trading
- Serkan Karadas
- A version of the paper can be found here.
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This paper investigates whether the members of Congress are informed traders by studying the information content of approximately 62,000 congressional common stock transactions over the 2004-2010 period via pooled regressions and transactions-based calendar-time portfolios. We present evidence that past rm-level trading activity by politicians predicts current rm-level stock returns, and this prediction is stronger for the pre-recession period and for small rms. We also document that there are abnormal returns on the powerful politicians’ portfolios constructed by longing the buy and shorting the sell transactions. The best performing group is the unsophisticated (i.e., inexperienced in trading) powerful Republicans with abnormal returns exceeding 34% on annual basis under one-week holding period. The abnormal returns decline monotonically as the holding period gets longer and they mostly disappear beyond three months. Our results imply that politicians trade on time-sensitive value-relevant information generating abnormal returns in the short-term, and the power and party membership play an important role in the distribution of value-relevant information.
STOCK Act Fixes Problem…but the Government Clowns “Fixed their Problem”
The Congress booted out the section (with unanimous approval) where they had to disclose their positions online. Classic.
Why so guarded, Congress?
Nice alphas! The results depend on the holding period and weighting scheme, but there is a large amount of excess return on the table (5%++). Interestingly, Republicans are the worst offenders (see paper for details)!
What are we doing wasting our time in the private sector?
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