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

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  • Tahoun, Ahmed

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.

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  • Tahoun, Ahmed, 2014. "The role of stock ownership by US members of Congress on the market for political favors," Journal of Financial Economics, Elsevier, vol. 111(1), pages 86-110.
    • Handle: RePEc:eee:jfinec:v:111:y:2014:i:1:p:86-110
    DOI: 10.1016/j.jfineco.2013.10.008
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    More about this item

    Keywords

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

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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