Thursday, May 26, 2011

There Ought to be a Law!

Turns out that our elected Representatives make a tidy profit through insider trading on companies and industries that they're expected to regulate according to a paper published in Business and Politics.  The authors, Alan J. Ziobrowski, James W. Boyd, Ping Cheng, and Brigitte J. Ziobrowski found
Consistent with the study of Senatorial trading activity, we find stocks purchased by Representatives also earn significant positive abnormal returns (albeit considerably smaller returns). A portfolio that mimics the purchases of House Members beats the market by 55 basis points per month (approximately 6% annually).
Now 6% might not seem like a lot, but in today's market, that's a significant edge over investors who do not have access to insider information.  But both parties and both houses of congress participate in this practice.
Consistent with Senate results, the trade-weighted House sample exhibits significant positive abnormal returns suggesting a substantial information advantage over ordinary investors. However, as hypothesized, the market-adjusted mean return earned by the House buy sample (55 basis points per month) is substantially smaller than that earned by the Senate sample (85 basis points per month).
The authors suggest that the best approach to tacking this problem is

...a policy requiring more timely and complete reporting of congressional security transactions may be in the public interest. Reporting requirements similar to those imposed on corporate insiders could be appropriate for helping voters evaluate the behavior of their Representatives in terms of the pursuit of personal profit versus obligations to the public interest. Such prompt reporting could also help level the playing field for all investors.

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