Leaders in Congress outperform rank-and-file lawmakers on stock trades by up to 47% a year

According to a recent National Bureau of Economic Research working paper, congressional leaders outperform representatives by as much as 47% annually.

Shang Jinwei of Columbia University and Columbia Business School together with Yifan Zhou of Xi’an Jiaotong University-Liverpool studied legislators who rose to leadership positions, such as Speaker of the House of Representatives as well as House and Senate leaders, whips, and caucus chairs.

Between 1995 and 2021, there were 20 such leaders who traded stocks before and after they rose to office. Wei and Zhou noticed that legislators performed below benchmarks before they became leaders, and then suddenly everything changed.

“Importantly, while we observe significant improvement in the trading performance of leaders as they ascend to leadership roles, the stock trading performance of matched ‘regular’ members does not improve much,” they wrote.

The leadership advantage in the stock market stems in part from its ability to set the regulatory or legislative agenda, such as determining whether and when a particular bill will be put to a vote. Setting the agenda also gives leaders advanced knowledge of when certain actions will occur.

In fact, Wei and Zhou found that leaders show much better returns on stock trades made when their party controls their board.

In addition, being a leader also increases access to non-public information. Although companies are reluctant to share such inside knowledge, they may prioritize disclosing it to leaders over rank-and-file lawmakers, the researchers said.

Leaders earn higher returns on companies that contribute to their campaigns or are headquartered in their states, which Wei and Zhou said can be attributed to “privileged access to company-specific information.”

Upper class also influences how other members of Congress vote, and the study found that the leader’s party is more likely to vote in favor of bills that help companies whose shares the leader owns, or against bills that hurt him. Leadership-owned stocks tend to see increases in federal contract awards, especially sole-source contracts, over the next year or two.

“These findings suggest that congressional leaders may not only trade privileged knowledge, but may also shape policy outcomes to enrich themselves,” Wei and Zhou wrote.

They added that stock trades by congressional leaders are predictive, anticipating more positive or negative news for companies over the following year. In particular, stock sales predict the number of regulatory hearings and actions over the next year, although purchases do not.

Investors have long suspected that Washington has a special advantage on Wall Street. This has led to the emergence of more politically themed ETFs, including funds that track portfolios owned by Democrats and Republicans in Congress.

Paul Pelosi, husband of former House Speaker Nancy Pelosi, is also popular among some investors who copy his stock movements.

Congress has tried to crack down on members’ stock holdings. The Stock Act of 2012 requires timely disclosure, but some lawmakers want to ban trading altogether.

A bipartisan group of House members is pushing legislation that would prohibit members of Congress, their spouses, dependent children, and guardians from trading individual stocks, commodities, or futures.

Last week, an impeachment petition was filed that would force a vote in the House if it received enough signatures.

“If leadership wants to put forward a bill that would actually do that and end corruption, we’re all for it,” Rep. Ana Paulina Luna, R-Fla., said on social media Tuesday. “But we are tired of the partisan games. This is the most partisan thing in the history of the United States, and it is time for the House to listen to the American people.”