Profiting from Connections: Do Politicians Receive Stock Tips from Brokerage Houses?

64 Pages Posted: 18 Feb 2021

See all articles by Andrew Stephan

Andrew Stephan

University of Colorado at Boulder Leeds School of Business

Beverly R. Walther

Northwestern University - Department of Accounting Information & Management

Laura Wellman

Pennsylvania State University; Pennsylvania State University - Department of Accounting; Penn State University

Date Written: January 2021

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 in a short window. Our estimates suggest that these connected trades earn an incremental 0.3% over a five-day window relative to the politician’s average trade profitability, translating into an incremental $3,411 in annual trading profits. We provide additional support for our inferences 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 value-relevant political information.

Keywords: Congressional trading; Political connections; Information exchange; Security analysts

JEL Classification: G24, G38, G14

Suggested Citation

Stephan, Andrew and Walther, Beverly R. and Wellman, Laura, Profiting from Connections: Do Politicians Receive Stock Tips from Brokerage Houses? (January 2021). Available at SSRN: https://ssrn.com/abstract=3761236 or http://dx.doi.org/10.2139/ssrn.3761236

Andrew Stephan

University of Colorado at Boulder Leeds School of Business ( email )

419 UCB
Boulder, CO 80309-0419
United States

Beverly R. Walther (Contact Author)

Northwestern University - Department of Accounting Information & Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-467-1595 (Phone)
847-467-1202 (Fax)

Laura Wellman

Pennsylvania State University ( email )

378 Business Building
University Park, PA 16802
United States
6026225683 (Phone)

Pennsylvania State University - Department of Accounting ( email )

University Park, PA 16802-3306
United States

Penn State University ( email )

University Park, PA 16802-3306
United States

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