The Market for Information: Evidence on the Exchange of Information Between Brokerage Houses and Politicians

• In Event: Political Connections and Lobbying

Abstract

In this study, we investigate whether politicians connected to brokerage houses obtain value relevant information from these brokerages for use in generating profitable stock trades. We measure politicians’ connections to brokerages based on political contributions received. We find trades executed by connected politicians are more profitable than those executed by non-connected politicians, consistent with brokerage houses tipping politicians to reinforce their connections and enhance access to political information. As additional evidence of brokerage house tipping, we show connected trades executed prior to recommendation revisions, when analysts are privately informed, are more profitable. Further, to shed light on a quid-pro-quo of information exchange, we examine politicians’ trading behavior surrounding the Affordable Care Act. Our results suggest that brokerages provide stock tips to politicians in exchange for value-relevant political information.

Authors

• Andrew Stephan, Northwestern University

• Beverly R Walther, Northwestern University

• Laura A. Wellman, University of Utah