Firms may be well-served to target an expanded breadth of government.
By Sarah Steimer
There’s been a lot of noise in recent years about lawmakers’ stock purchases and new research in the Strategic Management Journal found stock purchases by U.S. Senate members generate abnormal returns, presumably due to the perception of insider trading.
The researchers found abnormal returns are higher if the senator has direct jurisdiction over the firm by way of committee assignments, along with an increase in abnormal returns if the firm is tied to the senator via lobbying-sponsored legislation and political action committee contributions. However, they found little evidence that stocks traded by Congress members outperform the market — in fact, they found that stocks sold and purchased by senators experienced negative abnormal returns over the six- to 12-month period following the transaction date. This suggests that the perceptions of insider trading don’t necessarily match reality.
So for investors, this means that — yes — the market reacts positively to the purchase of stock by a senator, but there’s no similar effect for stock sales. It means that information about senators’ stock purchases is likely more valuable to investors than stock sales.
And while firms may not have direct control over if or when a senator invests in a firm, the results suggest that the connection of the firm to the legislator — by way of lobbying the senator’s legislative proposals or campaign contributions — does matter.
“This suggests that firms should target an expanded breadth of government,” says study co-author Mirzokhidjon Abdurakhmonov, an assistant professor of management at the University of Nebraska-Lincoln. “Since by targeting broader government, firms not only mitigate risks emanating from the government, but also generate positive market returns if and when legislators invest in such firms.”
Abdurakhmonov M., R.E. Snider, J.W. Ridge, & D. Hasija (2022). Perceptions of political Self-Dealing? An empirical investigation of market returns surrounding the disclosure of politician stock purchases. Strategic Management Journal. https://doi.org/10.1002/smj.3459.
Sarah Steimer is a Chicago-based writer and editor with experience in magazines, newspapers and multimedia projects. She has covered subject matter that spans local news, marketing, medicine, food and more.