Senators Or Stock Market Gurus?

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Apparently it’s both, and that has some people whispering “insider trading.”

From the New Yorker:

Last year, Alan Ziobrowski, a professor at Georgia State, headed the first-ever systematic study of politicians as investors. Ziobrowski and his colleagues looked at six thousand stock transactions made by senators between 1993 and 1998. Over that time, senators beat the market, on average, by twelve per cent annually. Since a mutual-fund manager who beats the market by two or three per cent a year is considered a genius, the politicians’ ability to foresee the future seems practically divine. They did an especially good job of picking up stocks at just the right time; their buys were typically flat before they bought them, but beat the market by thirty per cent, on average, in the year after. By those standards, Frist actually looks like a bit of a piker.

Are senators really that smart? The authors of the study suggest a more likely explanation: at least some senators must have been trading “based on information that is unavailable to the public��in other words, they were engaged in some form of insider trading. It’s impossible to pin down exactly how it happened, but it’s easy to imagine senators getting occasional stock tips from corporate supplicants, and their own work in Congress often deals with confidential matters that have a direct impact on particular companies.

Naw, it’s just a coincidence. They wouldn’t possibly do anything illegal…

But seriously, how greedy can these people get? Why would they put their entire careers at risk to gain more money. Sad if it’s true, and it certainly appears to be true.

And here’s a little bit more on insider trading.

Ultimately, insider trading is an inefficient way of achieving market efficiency, because insiders earn all their profits on the lag between when they start selling and when the market figures out what’s going on. This gives them every reason to hoard information, with the result that stock prices are out of whack for longer than they otherwise would have been. Markets thrive on transparency, but insider trading thrives on opacity.

Insider trading therefore encourages executives to put their own interests before those of their shareholders. In fact, the real scandal of insider trading is not what’s illegal but what’s legal. For instance, although many companies have a rule that their employees can buy or sell company stock only during preordained periods, known as “trading windows,� they don’t need to announce in advance if they’re going to buy or sell during a window. So executives who get bad news can still dump shares relatively freely (or, if they get wind of good news, buy freely). They also have an incentive to delay disclosing news until after they’ve bought or sold all they can. Alan Jagolinzer, an accounting professor at Stanford, has shown that the stocks sold by insiders tend to drop after the sales go through, and a Financial Times study of the twenty-five biggest bankruptcies in the wake of the stock-market crash found that executives and directors in those firms collectively unloaded almost three billion dollars of stock even as their companies headed to oblivion.

Political Wire has more.

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