By Sanford Bragg
Who profits more from non-public information, U.S.
senators or hedge funds? Academic studies suggest that the
stock portfolios of U.S. Senators significantly outperform most
hedge funds, providing positive abnormal returns of 85 basis
points per month over extended periods. Pension funds would do
better to invest with senators than with most asset
Two studies-authored by Alan J. Ziobrowski of
Georgia State University, James W. Boyd of Lindenwood
University, Ping Cheng of Florida Atlantic University and
Brigitte J. Ziobrowski of Augusta State University-examined
Congressional stock filings to test whether test whether common
stocks purchased by Congressmen exhibit positive abnormal
returns. The authors hypothesized that if Congressional
transactions yield significant positive abnormal returns, it
would suggest that Congressmen trade with information
unavailable to ordinary investors.
The results showed that the common stocks purchased
by Congressmen earn statistically significant positive abnormal
returns. A portfolio that imitates the common stock purchases
of U.S. Senators outperformed the market by 85 basis points per
month on a trade-weighted basis while the Representatives'
portfolio outperforms the market by 55 basis points per month.
The authors conclude that the abnormal returns evidence the use
of nonpublic information in Congress: "We find strong evidence
that Members of the House have some type of nonpublic
information which they use for personal gain."
Congressional portfolios bested returns from
corporate insiders, which outperform the market by 50 basis
points per month according to studies. According the study,
"[Senate] portfolios show some of the highest excess returns
ever recorded over a long period of time, significantly
outperforming even hedge fund managers." By contrast, studies
of ordinary investors suggest that the average household
underperforms the market by 12 basis points per month.
The study authors did not find it surprising that
Senators outperformed House members. There are fewer Senators,
they hold longer terms and they have the power of the
filibuster. Plus, Senators tend to be wealthier than House
As we have noted in the past, trading on non-public
information is not necessarily illegal for those in Washington.
There are no prohibitions against trading information about
pending legislation or regulation that impacts stocks.
The Senate Code of Official Conduct places no
restrictions on Senators' securities transactions. In the
House, the ethics code prohibits members of Congress from using
their official positions for private profit and may not use
confidential information obtained in the performance of their
government duties for personal gain. However the Ethics Manual for Members, Officers, and Employees of
the U.S. House of Representatives defends unrestricted
stock trading arguing that divestiture or voting restrictions
might impair House members from effectively representing their
A study published by Gregory Boller in 1995 showed
that members of the United States Congress regularly purchase
common stock in companies that they regulate through
legislation. From a random selection of 111 Congressional
delegates (House and Senate) who purchased common stock from
1991 through 1993, Boller found that 25% of the members sampled
"showed stock transactions that directly coincided with
Do Republicans in Congress outperform Democrats in
their stock portfolios? Surprisingly, the studies by Ziobrowski
et al., which analyzed transactions made in the 1990's, found
that Democrats outperform Republicans, although only in the
House was the difference statistically significant. The authors
explain this based on the control of the House at the time.
"[I]t should be noted that Democrats controlled the House for
10 of the 17 years covered by this study. Furthermore,
Democrats were deeply entrenched in the leadership of the House
for decades prior to the study. Thus when Republicans finally
took control in 1995, they arguably had far less experience at
handling the reins of power and may therefore have been unable
to immediately enjoy all its perquisites."
The study authors call for better transparency in
Congressional securities trading, recommending "a policy
requiring more timely and complete reporting of congressional
security transactions... Reporting requirements similar to
those imposed on corporate insiders could be appropriate for
helping voters evaluate the behavior of their Representatives
in terms of the pursuit of personal profit versus obligations
to the public interest."
The Senate study, originally published in 2004,
can be found here. The House study, published earlier this
be found here.
Bragg is president and CEO of Integrity Research
Associates, an information and solutions provider
specializing in evaluating alternative research.