Profiting from connections: Do politicians receive stock tips from brokerage houses?

Andrew P. Stephan, Beverly R. Walther*, Laura A. Wellman

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This study investigates whether brokerage houses appear to provide stock tips to politicians. Our results indicate that trades by politicians who are politically connected to the brokerage house where the trade is executed are more profitable. Our estimates suggest that these connected trades earn an incremental 0.3% over a five-day window relative to the politician's average profitability. Given the average number of trades our sample politicians execute in a year, the 0.3% return per trade translates to an incremental $3,411 in trading profits each year. We provide additional support by investigating the frequency and differential profitability of politicians' trades immediately before the brokerage house issues a revised recommendation, as well as during a period when Goldman, Sachs & Co. was sanctioned for providing stock tips to high priority clients. Additional tests suggest that brokerages may provide stock tips to politicians in exchange for favorable legislative outcomes or political information.

Original languageEnglish (US)
Article number101401
JournalJournal of Accounting and Economics
DOIs
StateAccepted/In press - 2021

Keywords

  • Congressional trading
  • Information exchange
  • Political connections
  • Security analysts

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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