Graduation Year

2021

Document Type

Dissertation

Degree

D.B.A.

Degree Granting Department

Finance

Major Professor

Christos Pantzalis, Ph.D.

Co-Major Professor

Jung Chul Park, Ph.D.

Committee Member

Ninon Sutton, Ph.D.

Committee Member

Stephen Ferris, Ph.D.

Keywords

Abnormal idiosyncratic volatility, legislator’s trading, political risk, STOCK Act

Abstract

In this dissertation, I examine senators’ stock transactions, filled both electronically and on paper, between 2012 and 2020 to assess the extent of politicians’ insider trading and its impact on the market. The results suggest that senators use inside political information when investing. I find that both the estimated realized returns and buy-and-hold market abnormal returns are positive and significant. The extent of returns depends on the various personal characteristics of senators. Furthermore, there is evidence that senators attempt to obscure their more profitable trades, further suggesting that they use inside information when trading.

To extend traditional return-based methods, I propose a new comprehensive approach based on abnormal idiosyncratic volatility (AIV), which captures the degree of information asymmetry around the trading dates of senators. I find that senator trades are associated with substantially high levels of AIV, greater than information asymmetry associated with quarterly earnings. This suggests that senators and congress members may represent only the tip of the iceberg since many more individuals with access to the same information do not have to report their trades.

Lastly, I use aggregated senator trading activities to signal upcoming political and policy-related shocks. The proposed measures convey important future information on an industry level. Senator trading activity is a significant predictor of future returns, market sentiment, and firm risk measures such as bid-ask spread, return volatility, and idiosyncratic volatility. These results are robust across various specifications and are not explained by previous risk measures. Overall, there needs to be further discussion and deliberation leading to legislation aimed at strengthening the STOCK Act.

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