From K Street to Wall Street: Politically Connected Analysts and Stock Recommendations

• In Event: Sell-Side Analyst Industry

Abstract

In this study, we examine whether sell-side security analysts gain inside information from political connections. We measure an analyst’s political connections based on the contributions made by their brokerage house employer. We argue that to the extent brokerages invest in political connections to obtain private information, analysts at politically connected brokerages are more likely to cover firms in general, and especially firms for which this information is more valuable. We use how sensitive the firm is to policy changes (as proxied by their lobbying expenses) to identify situations where this political intelligence is even more valuable. We also predict that analysts at politically connected brokerages issue more profitable stock recommendations. This increased profitability should be even more apparent for policy sensitive stocks. Our evidence is consistent with these predictions. To provide further support, we document that the increased profitability of stock recommendations issued by politically connected brokerages is present only when Congress is in session and when there is high economic policy uncertainty. Collectively, these results suggest that brokerage houses obtain value-relevant, non-public political information from their political connections.

Authors

• Dane M Christensen, The University of Arizona

• Michael B Mikhail, Arizona State University

• Beverly R Walther, Northwestern University

• Laura Wellman, Arizona State University