SHOCKER: Legislators’ Investments Generating ‘Abnormal Returns’


A new study titled "Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives," in the journal Business and Politics, finds that "a portfolio that mimics the purchases of House Members beats the market by 55 basis points per month (approximately 6% annually)."

The abstract explains:

A previous study suggests that U.S. Senators trade common stock with a substantial informational advantage compared to ordinary investors and even corporate insiders. We apply precisely the same methods to test for abnormal returns from the common stock investments of Members of the U.S. House of Representatives. We measure abnormal returns for more than 16,000 common stock transactions made by approximately 300 House delegates from 1985 to 2001. Consistent with the study of Senatorial trading activity, we find stocks purchased by Representatives also earn significant positive abnormal returns (albeit considerably smaller returns).

The Center for Responsive Politics says this "indicates that members of Congress have a significant information advantage in making financial investments when compared to average, and even corporate, investors."

Of course they do. But what really makes their trades different from those of "average, and even corporate, investors" is that, unlike employees of Goldman Sachs, JPMorgan, or the Blackstone Group, it is perfectly legal for congressmen and women to trade on inside information.

No, seriously.

We took a look at the phenomenon of Congressional legislators and their surprisingly successful investment portfolios back in February. One reason they might beat the market so handily, with such consistency, could have something to do with the fact that insider trading laws don’t apply to members of Congress.

Or their staff members.

No, seriously.

Believe it or not, the Securities and Exchange Act does not apply to members of Congress, according to Craig Holman, legislative representative at government watchdog group Public Citizen.

“Any inside, non-public knowledge they gain can be acted upon,” Holman told me. “Some of the stories are just… breathtaking."

The "previous study" the authors of the new House of Representatives paper refer to was ublished in 2004 by Georgia State University business professor Alan Ziobrowski in the Journal of Financial and Quantitative Analysis and examined Senators’ mandatory financial disclosure reports between 1993 and 1998.

“Our goal in this research is to determine if the Senators’ investments tend to outperform the overall market,” Ziobrowski wrote. “Such a finding would support the notion that Senators use their informational advantage for personal gain. We test whether the common stocks purchased and sold by US Senators exhibit abnormal returns.

"Assuming returns are truly ‘incidental,’ we hypothesize that US Senators should not earn statistically significant positive abnormal returns on their common stock acquisitions (the null)," he continued. "Rejection of the null, i.e. a finding of statistically significant positive abnormal returns, would suggest that Senators are trading stock based on information that is unavailable to the public, thereby using their unique position to increase their personal wealth.”

What Ziobrowski and his co-authors found was that during the period studied, US Senators’ stock portfolios annually outperformed the market by 12%. Over the same period, US households annually underperformed the market by 1.4%.

“These results,” they concluded, “suggest that Senators knew appropriate times to both buy and sell their common stocks.”

Ziobrowski later told an interviewer, “I mean, they do better down market, up market. They just outperform the average. We have every reason to believe they are trading on information that the rest of us don’t have.”

Even Henry Manne, the economist who famously made a case for legalizing insider trading in his book “Insider Trading and the Stock Market” draws the line here. In an email to, he wrote:

In my 1966 book I said unequivocally that insider trading by any government officials on information received in the course of their work should be outlawed. The economic consequences of this trading on stock prices will be the same as any other informed trading, but there are many other aspects to the economic argument for legalizing insider trading generally that just will not pass the ‘smell test’ for government officials. The compensation argument for corporate insider trading cuts in exactly the opposite direction for government officials. We do not want them to receive extra compensation or outside compensation for doing their jobs. And, of course, all too frequently their access to this information is merely another form of a bribe, and that sure as hell is not legal.

Congressional insider trading is not a new phenomenon; a handful of media reports have surfaced over the past several years, but, as Holman says, the story “never really stuck.”

In a 2009 article on The Hill’s “Congress Blog,” Holman explained the loophole.

"The Securities and Exchange Commission does not have the authority to hold employees of Congress or the Executive Branch liable for using non-public information gained from official proceedings for insider trading. Under current law, ‘insider trading’ is defined as the buying or selling of securities or commodities based on non-public information in violation of confidentiality — either to the issuing company or the source of information. Most federal officials and employees do not owe a duty of confidentiality to the federal government and thus are not liable for insider trading."

Of course, members of Congress do owe a duty of confidentiality to the citizenry by whom they were elected. That's why congressional ethics rules specifically state that members must not use privileged information gleaned during the course of their duties for personal gain. But the rule is just a rule; it is not legally binding, and the SEC has never brought an enforcement action against any member of the Senate or the House.

Read the rest of the article