February 25, 2004 (Atlanta) -Until now, the primary focus of ethical concern with respect to legislative activity has been on campaign finance reform. However, a new study forthcoming in the Journal of Financial and Quantitative Analysis suggests that some U.S Senators use information not available to other investors when making their personal investment decisions. They found that the Senators' common stock investments significantly outperformed the earnings of other investors by almost 12% annually.
According to the study, based on data from 1993 to 1998, the stocks in which the Senators invested yielded unusually high profits beginning shortly after the Senators bought them and continued to earn extraordinarily large returns for a full year. After these stocks were sold, their profitability returned to normal. The results also indicate that Senators invested far more money in those stocks that ultimately earned the greatest returns.
"This certainly suggests that some Senators knew precisely which stocks to buy, when to buy them, and when to sell them," says Alan J. Ziobrowski, associate professor at the Robinson College of Business and co-author (with Ping Cheng, assistant professor at Florida Atlantic University, James W. Boyd, associate professor at Kent State University and Brigitte J. Ziobrowski, professor at Augusta State University) of "Abnormal Returns from the Common Stock Investments of the United States Senate."
While the study did not find any reliable differences between the returns earned by Democrats and Republicans, seniority did appear to have an impact.
"We found that Senators with the least seniority, in their first senatorial term, earned statistically higher returns than those who had served in the Senate for more than two terms," said Ziobrowski.
Ziobrowski notes that despite the fact that the Senators have a definite informational advantage over other investors this type of investing does not constitute any illegal activity since current laws do not prohibit Senators from trading stock on the basis of information acquired in the course of performing their normal Senatorial functions.
However, the study also concludes that, "Political power confers many benefits. Among those are privileged access to information, the power to influence legislation and the power to influence the application of regulatory jurisdiction by administrative agencies. It therefore makes sense that politicians would use such powers for personal gain and also that they compete for any rents that arise from such influence. Our results are consistent with the hypothesis that such rents do indeed exist."
