« Another debate | Main | Alternative Histories »

A Heavy Accusation

Do Senators routinely profit on short-term stock trades, based on greater knowledge than the average investor? That's the implied charge in an article about an academic study linked to in a number of good blogs this week. (Kevin Drum, Tyler Cowen -- via Daniel Drezner, Jane Galt)

The study found that, in the period 1993-1998, based on extrapolations from financial disclosure reports, Senators buying and selling common stocks beat the market by 12%, while ordinary investors lag the market and corporate executives beat the market by only 5%. The study cited concludes that "These results suggest that Senators knew appropriate times to both buy and sell their common stocks."

That's a heavy accusation, and it piqued my curiosity, so I got a copy of the study by Alan Ziobrowski of the Real Estate Department at the J. Mack Robinson School of Business at Georgia State. (It's not yet published.) I was a little skeptical, not because I doubt that many Senators are corrupt and take advantage of their positions, but because it's a little hard to understand exactly how most Senators would come to have the knowledge needed to time stock transactions. 90% of Senate business is unlikely to have any predictable effect on any specific company's stock price. And of the things that do -- such as the Telecommunications Act of 1996 -- it's hard to see when the Senators have a real information advantage. If, for example, you knew that an amendment would pass on the telecommunications bill that would give an advantage to, say, AT&T, you could theoretically make some quick money buying the stock before the vote. But if you as a Senator know the amendment will pass, chances are, so do the hundreds of specialized reporters and lobbyists that are feeding information back into Wall Street. You might have a few hours advance notice that a company in your state is getting a federal contract. But if you're like most Senators, your #1 priority is to get credit for announcing it, so you don't really have time for a quick call to your broker before you hit the Senate press gallery or fax out a press release.

On the other hand, Senators might obtain profitable inside information or access to intitial public offerings of stocks from lobbyists, friends or contributors as a kind of bribe, which is a more serious charge. During this period of time, at least two Senators had been investigated for making quick profits on initial public offerings and penny stocks: Al D'Amato and Bob Toricelli. So I was curious if those two had distorted the study. In a footnote, the study says that IPOs were not included at all (why not?), so neither D'Amato nor Toricelli, nor the most identifiable type of actual corruption, figure. The study does note that of the 6,000 stock transactions he tallied in the six-year period, more than half were accounted for by only four Senators: the late Claiborne Pell of Rhode Island, John Danforth of Missouri, John Warner of Virginia, and Barbara Boxer of California. The first two retired in the mid-1990s, well before the period covered in this outdated study ended. Danforth, Pell and Warner are also all heirs to great estates (Warner's first wife was a Mellon heiress), and Pell and Danforth were Senators of absolute, unquestioned integrity. (Not to denigrate the other two.) Boxer, as it happens, was a stockbroker by profession before entering politics, so perhaps knows what she's doing.

The Ziobrowski study recalculates the results by another statistical method (which I am not qualified to evaluate), that he says weights the Senators equally and thus eliminates the distortion of the four heavy traders, finding by this method a smaller but still statistically significant advantage in the Senators' stock purchases, though not their sales. Ziobrowski concludes based on this method that "trading with an informational advantage is common among Senators." Yet in the first years of the study, which is when the advantage appears, only 25-27 of the hundred Senators traded stocks at all. So it is not "common," since it is actually not common for Senators to trade stocks at all. In the last two years of the study, the number of Senators actively trading stocks rose into the high 30s, but in those later years, the Senators' advantage over the market also disappeared.

The study performs various other statistical breakdowns of the data, by party, by committee assignment and by seniority, but with each breakdown, the sub-sample of the 25 actively trading Senators naturally gets even smaller. He concludes that first-term Senators do better than Senators with more seniority, but that's a counterintuitive result: If Senators were trading on either information about congressional action, or on information provided by lobbyists, in either case Senators with greater seniority, and hence greater power, should be at an advantage. Counter-intuitive results such as this should suggest that the results are mostly statistical anomalies resulting from the small samples. And it also seems to me that, before concluding that Senators trade on an information advantage, there should be some effort to determine what the information advantage is and whether the stocks in question were those on which a Senator might have some information.

It is a provocative study, and should not be written off altogether. And IPO profits should certainly be included. But for the most part, this seems like public choice theory run amuck.

Posted by Mark Schmitt on February 27, 2004 | Permalink


TrackBack URL for this entry:

Listed below are links to weblogs that reference A Heavy Accusation:

» Life At The Top from Calpundit
LIFE AT THE TOP....I saw this story earlier today about how well senators did in the stock market but didn't pay much attention to it. Sure, they did way better than us ordinary schmoes. And yeah, they even did a... [Read More]

Tracked on Mar 1, 2004 2:45:41 PM

» Stocks from Keywords
It is hard to see much democracy in the distribution of stock ownership. THe bottom half of the population held 1.4% of total stock in 2001, with an average portfolio of just over $3,000. And since only a minority of bottom-half households own any stoc... [Read More]

Tracked on Mar 2, 2004 10:01:11 AM

» re: Senators are really good at stock-picking from The Old New Thing
[Read More]

Tracked on Mar 15, 2004 5:42:29 PM

» Bmw. Bmw part bmw motorcycle bmw usa bmw m3 bmw car from Godzik Blog
2005 BMW 5-Series. Competition from Acura, Audi and Mercedes-Benz Make AWD 5-Series Reality... [Read More]

Tracked on Jun 24, 2005 7:02:31 AM

» No Worms in this Apple from The Other Corner
Couldn't have said this (or this) better myself. Nowhere in the first amendment does it give someone the right to traffic stolen property... [Read More]

Tracked on Jun 25, 2005 1:16:15 PM

» Conspicuous absenc from Crooked Ti mber
Forbes is the latest magazine trying to capitalize on the blogging thing by holding a best blog competition across various categories. It’s interesting to note that no less than 53% of voters say that the best blog on the economy... [Read More]

Tracked on Jun 28, 2005 10:55:24 AM

» Email, RSS un Wikis from HIRSCgarden
Reiner Langenhan schreibt auf Handakte Von E-Mails zu RSS, in Reaktion auf meinen Beitrag im KMU-Blog: das kann ich nur best䴩gen! Ross Mayfield hat einen recht 䨮lichen Artikel in seinem Blog zu... [Read More]

Tracked on Jun 30, 2005 11:45:05 AM

» Canada scrambles to assert sovereignty in Arctic (Reuters) from - After decades
to assert its sovereignty over a gigantic region rich in mineral resources. [Read More]

Tracked on Apr 28, 2006 9:51:14 PM

» Avery Johnson Lobbies for Nowitzki as MVP from collecting the
Avery Johnson used his moment in the sun -- collecting the NBA Coach of the Year award Tuesday -- to promote [Read More]

Tracked on May 1, 2006 1:50:52 AM

» Finding Information on the Internet from Net Search
The University of California Berkeley recommends search strategies, explains search tools, and gives guidance on evaluating and citing web pages... [Read More]

Tracked on May 3, 2006 11:53:45 AM

» Best mp3 portals from MP3 Portals - Search for Music
Free MP3 music downloads from many music websites and portals... [Read More]

Tracked on May 5, 2006 7:16:43 AM

» Newspaper Circulation Down, Web Readers Up from circulation drops
circulation drops 2.5 pct.; newspaper-run Web sites see 8 pct. increase in viewers [Read More]

Tracked on May 15, 2006 4:51:42 AM

» Dictionary Search Page from Dictionary Search
An unabridged dictionary from aalii to zymurgy, including a pronunciation guide... [Read More]

Tracked on May 26, 2006 11:37:13 PM

» WebPals from Full Catalog
Need some help with your search? Please click on How to search. ... Use the search criteria below to narrow your search. ... [Read More]

Tracked on Jun 5, 2006 3:05:44 PM

» UBC Researchers Find Stroke Death Channel from may soon be possible,
which key chemicals are lost from brain cells during stroke, causing the cell death that disables stroke victims. [click link for [Read More]

Tracked on Jun 15, 2006 3:58:07 PM

» POLITICS: Pornographers Unite! from third circuit
of conservatism" can apply their own local standards about obscenity to the internet, he said. The [Read More]

Tracked on Jun 17, 2006 2:47:06 PM

» Free Vacations for Harder Work from acation and Merchandise
acation and Merchandise Incentives Boost Productivity, Morale [Read More]

Tracked on Jul 1, 2006 11:12:07 AM

» Suns Facing Elimination by Lakers from The Suns find
their hard work determination, they were unable to stop the Los Angeles and Kobe Bryant from [Read More]

Tracked on Aug 1, 2006 5:07:23 PM


First-term senators are probably more reliant on lobbyists than are senior senators, who can probably consider themselves free agents. So to the extent that the insider information comes from lobbyists, this result isn't counterintuitive.

Posted by: phil | Mar 2, 2004 4:23:48 PM

One aspect of the issue you didn't cover is that there are likely people that watch the stocks purchased by Senators and buy them with the assuption that the Senators have inside information. If that's the case the extra purchases would drive up the price of the stock. That means all the Senator would have to do to make a profit is buy the stock and let the investor's reaction take care of the rest.

I don't personally trade stock so I have no idea if there's any way to find out when a particular person makes a stock trade. Obviously it must be possible to find out eventually or they wouldn't have been able to create the paper that sparked this debate.

Posted by: Steve Hiner | Mar 16, 2004 1:02:49 PM

very good

Posted by: alberghi | Jun 21, 2004 3:56:43 AM


Posted by: antonella | Jul 23, 2004 10:06:01 AM

The "late" Claiborne Pell? You published this in Feburary. Today, October 1st, he remains quite alive here in RI. Best, - EJR

Posted by: Edward J. Renehan Jr. | Oct 1, 2004 4:41:18 PM

You can find out when a particular person makes a stock trade.Traders become emotional when trading stocks.:)) that is the way to understand.

Posted by: steven davies | Jul 3, 2007 2:14:18 PM