The role of stock ownership by US members of Congress on the market for political favors ^☆

Ahmed Tahoun^,

doi:10.1016/j.jfineco.2013.10.008

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Abstract

I examine whether stock ownership by politicians helps to enforce noncontractible quid pro quo relations with firms. The ownership by US Congress members in firms contributing to their election campaigns is higher than in noncontributors. This bias toward contributors depends on the financial incentives of politicians and the relation's value. Firms with a stronger ownership–contribution association receive more government contracts. The financial gains from these contracts are economically large. When politicians divest stocks, firms discontinue contributions to the politicians, lose future contracts, and perform poorly. Politicians divest the stocks in contributors, but not in noncontributors, in anticipation of retirement.

JEL classification

D72;
G10;
G11;
G18;
G38

Keywords

Portfolio choice;
Politics of financial markets;
Government contracts;
Politicians–firms relation;
Investment by politicians

☆: I am indebted to Laurence van Lent for his continuous support, guidance, and valuable discussions. I sincerely appreciate the many helpful comments from Joshua Coval (the referee). I thank my dissertation committee members: Martin Walker (chair), Begoña Giner, and Norman Strong. I thank Stanley Baiman, Ray Ball, Tim Besley, Jennifer Blouin, Hans Christensen, Joao Coco, Renuka Fernando, Daniel Ferreira, Henry Friedman, Martin Giraudeau, Francisco Gomes, David Kershaw, Andrei Kovrijnykh, Christian Leuz, Yuval Millo, Sam Peltzman, Andrea Prat, Paola Sapienza, G. William Schwert (the editor), Edmund Schuster, David Skeie (the discussant), Abbie Smith, James Snyder, Wim van der Stede, Ane Tamayo, Irem Tuna, the doctoral students at the Wharton School, seminar participants at LSE, the 2011 AFA annual meeting, University of Chicago, the Wharton School, Columbia Business School, Kellogg School of Management, LBS, INSEAD, and especially John Core for feedback and comments. I gratefully acknowledge the financial contribution of Tilburg University, the European Commission Research Training Network INTACCT (MRTN-CT-2006-035850), and LBS. I thank the Center for Responsive Politics, Eagle Eye Publishers, Inc., and Charles Stewart III (MIT) for making their data publicly available. I undertook part of this research while I was a visiting scholar at the Wharton School.

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Friday 15 May 2015