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

Andrew P. Stephan; Beverly R. Walther; Laura A. Wellman

doi:10.1016/j.jacceco.2021.101401

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

Accounting Information and Management

Research output: Contribution to journal › Article › peer-review

8 Scopus citations

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 language	English (US)
Article number	101401
Journal	Journal of Accounting and Economics
Volume	72
Issue number	1
DOIs	https://doi.org/10.1016/j.jacceco.2021.101401
State	Published - Aug 2021

Funding

We thank an anonymous referee, Brian Cadman, Andrew Call, Dane Christensen, Atif Ellahie, Michelle Hanlon (editor), Robert Holthausen, Michael Kirschenheiter (discussant), Thomas Omer, Doug Rayburn, Jordan Schoenfeld, and participants at the 2016 BYU Accounting Research Symposium, 2017 FARS Midyear Meeting, and 2018 University of Illinois at Chicago Accounting Research Conference for useful comments and suggestions. We appreciate the financial support from the Leeds School of Business at the University of Colorado , the Kellogg School of Management at Northwestern University , and the Smeal College of Business at Pennsylvania State University . Analyst recommendations are from Zacks Investment Research. Errors or omissions are our responsibility.

Keywords

Congressional trading
Information exchange
Political connections
Security analysts

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics

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10.1016/j.jacceco.2021.101401

Cite this

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title = "Profiting from connections: Do politicians receive stock tips from brokerage houses?",

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.",

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

Abstract

Funding

Keywords

ASJC Scopus subject areas

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