House members in the know score ‘abnormal’ stock profits, study says

Question of the Day

What has been the biggest debacle on Obama's watch?

View results

It’s no secret that members of Congress qualify as political insiders, but a new report strongly suggests that they also may be insiders when it comes to trading stocks.

An extensive study released Wednesday in the journal Business and Politics found that the investments of members of the House of Representatives outperformed those of the average investor by 55 basis points per month, or 6 percent annually, suggesting that lawmakers are taking advantage of inside information to fatten their stock portfolios.

“We find strong evidence that members of the House have some type of non-public information which they use for personal gain,” according to four academics who authored the study, “Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives.”

To the frustration of open-government advocates, lawmakers and their staff members largely have immunity from laws barring trading on insider knowledge that have sent many a private corporate chieftain to prison.

The watchdog group OpenSecrets.org said on its blog Wednesday that the findings suggest “that U.S. House members are using their powerful roles for more than just political gain.”

The professors reviewed more than 16,000 common stock transactions carried out by about 300 House members as revealed in the members’ financial-disclosure forms from 1985 to 2001.

In a 2004 study, the same professors found that U.S. senators also enjoy a “substantial information advantage” over the average investor — and even corporate bigwigs — when it comes to picking stocks. The latest study shows that members of the Senate outperform their House colleagues by an average of 30 points per month.

Despite the GOP’s reputation as the party of the rich, House Republicans fared worse than their Democratic colleagues when it comes to investing, according to the study. The Democratic subsample of lawmakers beat the market by 73 basis points per month, or 9 percent annually, versus 18 basis points per month, or 2 percent annually, for the Republican sample.

“Given the almost folkloric belief that Wall Street invariably favors Republicans, the superior performance of trades made by Democratic representatives may seem surprising,” the study authors said.

One theory is that Democrats were the majority for most of the years under review and thus held more leadership posts, giving them greater access to nonpublic information. Once they took power in 1995, Republicans may have limited their ability to profit from the perks of political power because of their lack of leadership experience.

Strict laws ban corporate executives from trading on their insider knowledge, but no restrictions exist for members of Congress. Lawmakers are permitted to keep their holdings and trade shares on the market, as well as vote on legislation that could affect their portfolio values.

The rationale is that requiring lawmakers to divest their economic holdings would “insulate a legislator from the personal and economic interests that his/her constituency, or society in general, has in governmental decisions and policy,” according to the House ethics manual.

Even so, concerns about members of Congress enriching themselves based on inside information has prompted at least one House bill, the Stop Trading on Congressional Knowledge (STOCK) Act, which would limit the ability of lawmakers to buy and sell stock shares.

First introduced in 2006, the bill has yet to reach the House floor. Its sponsors, Reps. Louise McIntosh Slaughter, New York Democrat, and Timothy J. Walz, Minnesota Democrat, reintroduced the bill in March.

“This is a matter of equality under the law,” Mr. Walz said at the time. “The same standards we have established for Wall Street should apply to Congress. The potential for abuse is obvious and troubling, and there is simply no good reason Congress should get to play by a separate set of rules in the stock market.”

Opponents of the bill argue that the best way to restrain lawmakers from abusing their access to inside information is full disclosure and transparency. All members of Congress are required to file annual financial disclosure reports that include their stock purchases and sales.

Any member viewed as taking unfair advantage of the system may be voted out of office. “However, the electoral process can only be an effective restraint against unethical conduct if the electorate is well-informed both in terms of the assets held by their representatives and the representatives’ voting records,” the study said.

The study also found that House members are less likely than senators to play the market. About 16 percent of House members purchased common stock in the years 1993, 1995 and 1997, compared with 27 percent of Senate members.

The difference is “most likely attributable to the fact that the average senator is far wealthier than the average representative,” the study concluded.

The study also found that the best stock pickers were House members with the least seniority. Calling this finding “counterintuitive,” the report suggests that junior members of Congress have more incentive to invest aggressively because they have less access to campaign funding.

“Members with the least seniority may have fewer opportunities to trade on privileged information, but they may be the most highly motivated to do so when the opportunities arise,” the report said.

The authors recommend a policy requiring more timely and complete reporting of congressional security transactions, similar to those now mandatory for business executives.

“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,” said the study. “Such prompt reporting could also help level the playing field for all investors.”

The authors of the report are Alan J. Ziobrowski of Georgia State University, James W. Boyd of Lindenwood University, Ping Cheng of Florida Atlantic University and Brigitte J. Ziobrowski of Augusta State University.

© Copyright 2014 The Washington Times, LLC. Click here for reprint permission.

Comments
blog comments powered by Disqus
TWT Video Picks