The role of stock ownership by US Members of Congress on the market for political favors

Tahoun, A (2014) The role of stock ownership by US Members of Congress on the market for political favors. Journal of Financial Economics, 111 (1). pp. 86-110. ISSN 0304-405X

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.