Study: Stock Purchases by Senators Generate Abnormal Returns for Firms

Jason Ridge
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Jason Ridge

Stock purchases by U.S. senators generated abnormal positive returns for the firms whose stock was purchased, according to a new study by U of A researchers. 

Based on public perception of politicians as unethical, the researchers hypothesized that stock markets would respond positively to purchases by senators. 

They examined a broad sample of stock purchases by members of the U.S. Senate between 2012 and 2020 and found that the firms experienced greater returns around the date the purchase was disclosed.

“Addressing the question of investments by public servants, our study provides insights into important public policy questions related to transparency and ethics in government,” said Jason Ridge, professor and chair of the Department of Strategy, Entrepreneurship and Venture Innovation in the Sam M. Walton College of Business. “It’s a complex problem, because much of it based on perception rather than what really might be going on.”

The researchers framed their study on public perception of politicians as unethical, as well as “information asymmetry” regarding 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 policy and regulation focused on investments and the stock market.

“Senators are perceived to have an informational advantage,” Ridge said. “Investors think they are trading on inside information. Though the information asymmetry is real, the perception of politicians using it for personal benefit is not necessarily true. But, here we have one of those situations where perception might be more important than reality, because this perception is driving investment behavior. The market is responding positively, based on these assumptions.”

The researchers found that abnormal returns were even higher if the senator had direct jurisdiction over the firm through a committee assignment. Again, returns were abnormally high as well in situations where the senator sponsored or supported legislation lobbied for by the firm. They were high also when firms had made contributions to a political action committee supporting the senator.

However, six to 12 months following the transaction date, stocks purchased and sold by senators experienced negative abnormal returns, the researchers found. Ridge said this finding suggests investors’ perception of senators purchasing stocks based upon governmental knowledge is likely innacurate over the long term, at least on average.

“To our knowledge, this is the first study that examines investor reactions to congressional stock purchases,” Ridge said. “Our results suggest not only do firms accrue potential market gains from legislators’ stock purchases, but also that the firm’s corporate political activities, such as lobbying a senator’s legislative proposals and campaign contributions, can amplify benefits when legislators have jurisdiction over the firm.”

The researchers’ study was published in Strategic Management Journal.

About the University of Arkansas: As Arkansas' flagship institution, the U of A provides an internationally competitive education in more than 200 academic programs. Founded in 1871, the U of A contributes more than $2.2 billion to Arkansas’ economy through the teaching of new knowledge and skills, entrepreneurship and job development, discovery through research and creative activity while also providing training for professional disciplines. The Carnegie Foundation classifies the U of A among the few U.S. colleges and universities with the highest level of research activity. U.S. News & World Report ranks the U of A among the top public universities in the nation. See how the U of A works to build a better world at Arkansas Research News.

Contacts

Jason Ridge, professor of strategy, entrepreneurship & venture innovation
Sam M. Walton College of Business
479-575-8493, jridge@walton.uark.edu

Matt McGowan, science and research communications officer
University Relations
479-575-4246, dmcgowa@uark.edu

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