Study: Stock Purchases by Senators Generate Abnormal Returns for Firms

Jason Ridge

photo submitted

Jason Ridge

Stock purchases by US senators generated abnormal positive returns for the companies whose shares were bought, according to a new study by U of A researchers.

Based on public perceptions of politicians as unethical, the researchers hypothesized that stock markets would respond positively to senator buying.

They examined a broad sample of stock purchases by members of the US Senate between 2012 and 2020 and found that companies generated higher returns around the day the purchase was announced.

“Our study addresses the issue of public sector investment and provides insights into important public policy issues related to transparency and ethics in government,” said Jason Ridge, professor and chair of the Department of Strategy, Entrepreneurship and Risk Innovation at the Sam M. Walton College of Economics. “It’s a complex problem because a lot of it is based on perception rather than what’s really going on.”

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Researchers framed their study on public perceptions of politicians as unethical and “information asymmetry” in relation to public policy and regulation. This asymmetry refers to a gap in quality information between investors and sitting members of Congress about current or future public policies and regulation focused on investments and the stock market.

“Senators are considered information leaders,” Ridge said. “Investors believe they are trading inside information. While information asymmetry is real, politicians’ perception of using it for personal gain is not necessarily accurate. But here we have one of those situations where perception might be more important than reality because that perception drives investment behavior. Based on these assumptions, the market is reacting positively.”

The researchers found that the anomalous returns were even higher when the senator was directly responsible for the company through a committee assignment. Returns were also unusually high in situations where the senator sponsored or supported legislation that the company advocated. They were also high when companies had made contributions to a political action committee supporting the senator.

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However, the researchers found that stocks bought and sold by Senators posted negative abnormal returns six to 12 months after the transaction date. Ridge said this finding suggests that investors’ perceptions that senators buy stocks based on government knowledge is likely to be inaccurate, at least on average, over the long term.

“To our knowledge, this is the first study to examine investor reactions to congressional stock purchases,” Ridge said. “Our findings suggest that not only do companies derive potential market gains from lawmakers’ stock purchases, but also that the company’s corporate policy activities, such as lobbying for legislative proposals and a senator’s campaign donations, can amplify benefits when lawmakers work for the company.” responsible is.”

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The researchers’ study was published in Strategic Management Journal.

About the University of Arkansas: As the flagship Arkansas institution, the U of A offers internationally competitive education in more than 200 academic programs. Founded in 1871, the U of A contributes more than $2.2 billion to the Arkansas economy by imparting new knowledge and skills, entrepreneurship and workplace development, discovery through research and creative pursuits, while providing training in professional disciplines. The Carnegie Foundation ranks the U of A among the few US colleges and universities with the highest research activity. US News & World Report ranks the U of A among the best public universities in the country. See how the U of A works to create a better world at Arkansas Research News.


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