Tuesday, October 26, 2004

U.S. Senators' Stock Picks Beat The Market

The Wall Street Journal just picked up this story, but it actually hit the press back in February.

NPR's All Things Considered has an archived interview available here.

Study finds senators profit from privileged information

STEVE CHIO Staff Writer
March 30, 2004

A new study conducted by a Robinson College of Business professor and colleagues concluded some U.S. senators profit from the use of information exclusively available to them when making personal financial investments.

Dr. Alan Ziobrowski, Associate Professor of Real Estate at Robinson College of Business, is a co-author, along 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 the forthcoming article in the Journal of Financial and Quantitative Analysis titled, “Abnormal Returns from the Common Stock Investments of the United States Senate.”

The study suggests senators have an advantage over other investors because of information made available to them due to their position in the U.S. Senate.

Presently, there is no law restricting these government officials from participating in common stock transactions.

According to the U.S. Senate Ethics Manual, “The strong presumption would be that the member was working for legislation because of the public interest and the needs of his constituents and that his own financial interest was only incidentally related.…”

When asked if there is any difference between a senator’s actions and insider trading, Dr. Ziobrowski stated there is not.

“Technically speaking, all of them deny they did anything,” stated Dr. Ziobrowski. “None of them would want to acknowledge they are personally profiting from their positions.”

Looking at data gathered from Financial Disclosure Reports, which was passed by Congress in the 1970s to create a more ethical government, from 1993 to 1998, Dr. Ziobrowski and colleagues, determined the stocks bought by sixty-two senators who invested during this time period, yielded unusually high return rates compared to the overall market.

Implying the senators knew what stocks to buy, when to buy and sell.

Dr. Ziobrowski mimicked the senators’ activities by completing similar buy and sell transactions with the same stocks as the senators’.

With these stocks, Dr. Ziobrowski created a “senate portfolio,” and tracked the behavior of that portfolio against the market. “We concluded that on average the senate portfolio beat the market by 85 basis points (or 12% annually),” said Dr. Ziobrowski.

“From the studies we’ve done in the past, it’s virtually impossible to beat the stock market by a statistically significant margin,” said Dr. Ziobrowski, “…similar to going to Las Vegas and winning on a long term basis, the chances of them (senators) being that lucky are very small.”

Based on the data, the researchers were able to determine that the stocks the senators invested in performed very well after its purchase. When the stocks were sold, their profitability returned to normal.

How the senators got the abnormal returns is debatable.“That’s the conundrum, we don’t know how,” stated Dr. Ziobrowski, “I can envision a hundred different ways. Senator gets a phone call from a friend at the FDA, Pentagon; there’s a wide variety of vehicles that could be used here.”

Although, the research looked at both Democrat and Republican senators, the study did not find any significant data to suggest one party had greater returns. But the researchers found seniority to play an important role.

Meanwhile, the research showed senators with least seniority, those who are serving in their first term, had greater returns than senators who had served more than two terms.

“We don’t know why,” stated Dr. Ziobrowski. He suggested maybe “The new guys may have more need for funds…than the old guys who’ve been there for twenty years.”

Even though, the current public disclosure law requires the senate to report their assets and stock transactions, Dr. Ziobrowski stressed the need for the public to understand that the current system is only a cosmetic issue.

“Theory was you could look at what they own and you could make a decision as to whether they were acting ethically or not, but that’s not true,” Dr. Ziobrowski said. “It tells me what they bought…I may know they own the XYZ company, but how will I ever know if they were doing anything to help out XYZ.”

Dr. Ziobrowski stated he would like to see tighter government restrictions on the actions of U.S. Senators.“You put out these studies and hopefully get their attention and hopefully stir up something.”

Read the article at the GSU Signal.

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