October 5, 2018
Concerns about governmental insider trading stem from the possibility that government officials may have access to non-public information that allows them to benefit financially. Existing research on the stock holdings of congressional members provides conflicting evidence about whether this should actually be a concern. Some research provides evidence that the stock holdings of members of Congress typically outperform the market by as much as 6 – 10 percent. Other research, however, suggests that the stock holdings of congressional members have not differed significantly from market performance in recent years.
Despite these conflicting findings, continued concerns about the possibility of insider trading have led to the passage of legislation intended to prevent policymakers from being able to benefit from trading on non-public information. In 2012, Congress passed the Stop Trading on Congressional Knowledge (STOCK) Act to prevent insider trading by members of Congress and government employees. A year later, in 2013, an amendment to the law was passed reducing the requirements for disclosure placed on employees and staffers of congressional members. This research examines the impact of the 2013 amendment to the STOCK Act on returns of those stocks most commonly held by members of Congress.
Using standard event study techniques, the authors find evidence that the stocks most commonly held by members of Congress outperformed the market during the period surrounding passage of the amendment. This finding helps answer the question of how the market responds to a perceived information advantage held by members of Congress. It suggests that the market does not respond negatively to the perception that insider trading may be occurring. In fact, this research suggests the stock prices of those stocks most commonly held by congressional members increase when restrictions on insider trading are relaxed.
CGO Graduate Research Fellow