A recent analysis has revealed a striking trend among congressional stock traders, with members of Congress significantly outperforming the S&P 500. Notably, this performance gap is most pronounced among congressional leadership, who reportedly achieve returns that surpass their peers by as much as 47% annually.
This insight comes from a working paper published by researchers Shang-Jin Wei from Columbia University and Yifan Zhou from Xi’an Jiaotong-Liverpool University. They focused on lawmakers who ascended to leadership roles, such as Speaker of the House and Senate floor leaders, analyzing their stock trading behaviors before and after they took on these influential positions from 1995 to 2021. The study highlighted a dramatic shift in stock trading performance when these lawmakers became leaders, noting that while they had underperformed benchmarks beforehand, their trading outcomes significantly improved once they assumed leadership roles.
The researchers attribute this enhanced performance to several factors, including the ability of leaders to influence regulatory and legislative agendas. This power grants them advance knowledge of critical legislative actions, which strategically benefits their investment decisions. The study found that leaders tend to exhibit much higher returns, particularly on trades made while their party is in control of the chamber.
Moreover, access to non-public information appears to be a substantial advantage for these leaders. Although companies typically refrain from sharing sensitive information, they are more likely to disclose details to influential lawmakers than to rank-and-file members. This privileged access is believed to lead to higher returns for leaders on stocks related to companies that contribute to their campaigns or are based in their states.
Another significant finding is that congressional leaders can sway their colleagues’ votes on bills impacting firms in which they hold stocks. The study revealed that members of the leader’s party are more inclined to support legislation beneficial to these companies’ stocks or oppose bills that could harm them. Additionally, stocks owned by leadership often see increases in federal contract awards, particularly sole-source contracts within a year or two.
The implications are substantial, suggesting that leaders not only capitalize on privileged information but may also actively shape policy outcomes to enhance their financial portfolios. Furthermore, the researchers noted that stock trades by congressional leaders can serve as predictors for future corporate news and regulatory changes, with stock sales often foreseeing an increase in relevant hearings or regulatory actions.
Concerns about the fairness of such advantages have prompted legislative discussions in Congress. The STOCK Act of 2012 was introduced to improve transparency through timely disclosures, yet some lawmakers are pushing for more stringent measures, including a complete ban on trading individual stocks, commodities, or futures by Congress members and their families.
A bipartisan coalition in the House is advocating for legislation that would impose such restrictions. Recently, a discharge petition was introduced to compel a vote on this issue, should it garner sufficient support. Representative Anna Paulina Luna expressed her views on social media, emphasizing the urgency of addressing perceived corruption and the need for Congressional accountability, asserting that this initiative represents a rare instance of bipartisan agreement and reflects the interests of the American public.
