Your tax dollars at work

A reader sent a link to the following paper. I had no idea.

Abnormal Returns from the Common Stock Investments of the U.S. Senate, by Alan J. Ziobrowski, Ping Cheng, James W. Boyd and Brigitte J. Ziobrowski, Journal of Financial and Quantitative Analysis, 2004, vol. 39, issue 04, pages 661-676.

The actions of the federal government can have a profound impact on financial markets. As prominent participants in the government decision making process, U.S. Senators are likely to have knowledge of forthcoming government actions before the information becomes public. This could provide them with an informational advantage over other investors. We test for abnormal returns from the common stock investments of members of the U.S. Senate during the period 1993-1998. We document that a portfolio that mimics the purchases of U.S. Senators beats the market by 85 basis points per month, while a portfolio that mimics the sales of Senators lags the market by 12 basis points per month. The large difference in the returns of stocks bought and sold (nearly one percentage point per month) is economically large and reliably positive.

Your tax dollars pay those savvy senators for early access to the information upon which they may be trading. Sounds rather unsavory. However, this study was conducted during the pre- or very early internet age. Whatever informational advantage senators have, it’s likely smaller now.

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