Congress’ stock trading was in the news last year after former senators David Perdue and Kelly Loeffler disclosed dumping stocks shortly after receiving private briefings on the coronavirus pandemic, just weeks before large parts of the economy shut down and markets crashed. These trades prompted many to wonder why U.S. senators and representatives, who are privy to a lot of non-public information, are allowed to trade individual corporate stocks that pose direct conflicts of interest with their work as legislators.
Sludge spoke with Aaron Hill, associate professor in the Department of Management at the Warrington College of Business, and Jason Ridge, professor of strategy in the Sam M. Walton College of Business at the University of Arkansas, about the conflicts of congressional stock trades and what could be done to address the situation.
Sludge: In 2017, you two co-authored a Harvard Business Review piece summarizing your findings on the signaling effects of congressional stock ownership, with Amy E. Ingram of Clemson University. I was wondering if you could start with an overview of the landscape of this type of conflict-of-interest research?
Hill: The field is relatively nascent—as we get more data, we can uncover more of these things. The problem is the disclosure laws are pretty limited and pretty opaque, so we can only really study what we can get access to data on. The current state of literature is essentially finding more and more nuance for outcomes tied to the same opaque raw data. It would really be helpful if we could get better data; unfortunately, the people that would approve that data are probably not going to want to shed more light on their own behaviors. Congress isn’t voting in additional reporting requirements for their own behaviors. It would be nice if they did, but until that point, we’re really kind of stuck as a field as to what we can study.
Second, the findings are actually pretty mixed. Some of that is because the data is not fine-grained—whether or not for the most part firms are benefiting is kind of up in the air, they benefit in some ways and don’t benefit in others. Whether or not members of Congress benefit off this is also up in the air, solely because we don’t have this fine grain of data.
That said, if it walks like a duck, and talks like a duck, it might be a duck. If members have potential to benefit, then there’s potential conflict of interest. We can eliminate both those things and have absolute certainty that it’s not a duck. Right now, it might be a duck, even if the evidence is mixed.
Sludge: Could you tell us more about your research into the effects of congressional stock ownership?
Hill: The conflicts of interest are apparent. Congress has loopholes with respect to the reporting of their stock portfolios, which gives them leeway to operate not in the same marketplace that a traditional investor does. Second, the burden of proof for insider trading is pretty high, we saw it last year with senators where the timing of their stock portfolio coincided very closely with announcements of COVID-19 changes, but they had enough alternative explanations that you couldn’t rule it was insider trading with definitive proof… I just don’t think that’s in the best interest of the American public on either side of the aisle. This isn’t a red or blue issue, the fact these loopholes exist are not good.
What frustrates me as a larger citizen is, we can foresee these conflicts of interest, it’s like putting candy in front of a three-year old kid, and expecting them to have will power not to take the candy when you turn your back. They may not take the candy, they may do everything you ask, but why would we put them in the position to take the candy if we don’t have to? We know that the candy is not what we want, but we refuse to change it as a society.
Sludge: What are some of the available fixes to disclosure laws in Congress?
Hill: One thing is that currently the reporting structure gives members a loophole with respect to when they time a trade and when they have to report it… shouldn’t that just be, hey, I’m making a trade today and part of me being a public servant is that my portfolio is public record? It just seems like that’s an easy compromise. I can see no valid reason why we would give someone 90 days [for annual reports; or a maximum of 45 days for securities transactions, according to the STOCK Act of 2012] to report a stock trade.
Sludge: There have been reform packages raised in Congress, like the Ban Conflicted Trading Act, and they weren’t advanced, so it’s clear we’re facing intransigence in political leadership.
Hill: Much like corrupt CEOs or bad boards of governance, it has to start with an active investor base, so it has to start with an active populace that says, hey, this is ridiculous, let’s vote in politicians that collectively will work to change this, because right now there’s no incentive for politicians to vote in additional restrictions to their behavior. It’s like asking a three-year old what they want for dinner, they’re probably going to say cake.
Ridge: A lot of research in accounting and finance has focused on congressional stock purchases and whether they outperform the market, that literature is somewhat mixed. It just seems that if you have people running for office, some of the most powerful in the world, transparency is great, but it seems like blind trusts are the clearest and easiest way from having these problems at all. If you run for an office to be one of the most powerful people in country, possibly a blind trust should be the expectation of everyone in that situation, and then we don’t have to worry about daily disclosure and insider trading. Whether they happen or not, they’re an optics problem, and we know that at least some investments are made based on them. The market tends to react when the stock purchases are disclosed.
Sludge: How can such reforms get traction to be passed?
Ridge: My personal perspective is that it’s not a big splashy subject that gets much attention unless there are events like the COVID-19 example, which are few and far between, and there are so many other things that are considered big issues—these are not things that people are voting on. But that’s the only way it’s going to happen, with a greater push to these types of ethical issues—having voters and the media pushing them to take a stance, “would you support this specific bill and why not,” trying to make sure we have an ethical and transparent Congress.
Hill: If politicians are owning stock in a pharmaceutical company, and the company has potential to benefit from their actions as a legislator, the company may benefit anyway, but it doesn’t help that politicians are owning these stocks and can potentially swing legislation, contracts, and subsidies in favor of their portfolios. Anytime that the interests of a politician and company are aligned and they’re not clearly advancing the national platform, that raises a red flag to me…. There’s potential for a company to act in interests that don’t necessarily advance the average American… could be infrastructure, internet issues, media issues. We need to get bias out of Congress, legislating is hard enough… we’ve taken a hard job and made it harder.
Sludge: You mentioned that the market tends to react when congressional stock transaction reports come online. Can you tell us more about your current research into market movements?
Ridge: We’re looking at, is there a signaling effect? Regardless of whether or not there is ‘insider information,’ the market responds to it. Maybe every politician in Congress doesn’t do anything that’s unethical, but even if that’s the case, economic decisions of other investors are being made because of it.
Hill: The fourth estate, the media, can play a role in continuing to keep this out there. This is a big problem that isn’t going away, this is something we can solve, and eventually movement will happen, it just has to be continually reinforced much like other social movements. There has to be a catalyst that continues to push the agenda, and the media can really play that role.
Ridge: This tends to be a niche area that people focus on—we need buy-in and databases that are driven at the Washington Post, New York Times, and what some would consider right-leaning publications, updated religiously as disclosures come out, maybe it could draw more continuous pressure from both sides. Politicians aren’t going to run on it, so it has to be something that’s continually pushed by large publications and I don’t know if that’s something that resources are going to be allocated towards.
Ahmed Tahoun is an associate professor at London Business School researching topics including the quid-pro-quo relations between politicians and the corporate world.
Amy E. Ingram is an associate professor in the College of Business and Behavioral Science at Clemson University who was a co-author of the 2017 piece in the Harvard Business Review and whose research includes topics of strategic leadership.
Susan Coombes is an associate professor at Virginia Commonwealth University whose research has included the impacts of corporate political activity and media viability on obtaining contracts.
Mary-Hunter McDonnell is an associate professor of Management at the Wharton School at the University of Pennsylvania whose research explores political interactions between corporations and their myriad stakeholders.