Why Do US Congressional Leaders Keep Beating the Stock Market?

By Shang-Jin Wei, Project Syndicate

Members of Congress continue to trade individual stocks even as they shape legislative agendas and gain access to non-public information. New research sheds light on how political power affects financial outcomes and underscores the need for reforms that draw a firm line between public office and private profit.

NEW YORK – When members of the United States Congress regularly play the stock market, should we really be surprised when they come out ahead? More than 100 US senators and members of the House of Representatives traded stocks in 2024. While the practice is legal, it is fueling public outrage – and for good reason.

The 2012 STOCK Act was designed to curb investment-related conflicts of interest, but several high-profile incidents have cast serious doubt on its effectiveness. Consider, for example, the four US senators who sold off shares immediately after a closed-door COVID-19 briefing in early 2020, just in time to avoid the subsequent market crash.

In a recent paper, Yifan Zhou and I examined congressional stock trading. We set out to answer a simple but critical question: Do US lawmakers – especially those in leadership positions – actually earn outsize returns, and if so, why?

Our analysis focused on the gap between congressional leaders – speakers, caucus leaders, whips, and committee chairs – and rank-and-file members. This distinction is important because leadership doesn’t just come with a bigger office; it confers agenda-setting power, access to closed-door briefings, and information that can move markets. Using data from 1995 to 2021, we tracked trades by every member of Congress who rose to a leadership position and compared their returns with those of “regular” lawmakers with similar backgrounds.

Before entering leadership roles (the “year zero” in the figure below), future leaders and their non-leader counterparts performed about the same, and neither group beat the market. But once members moved into leadership positions, their trading performance changed dramatically. On average, leaders outperformed non-leaders by up to 47 percentage points per year.

This remarkable turnaround can be traced to two distinct forms of access. The first is the political information and influence channel. Leaders know earlier – and in greater detail – which bills will advance or stall, which regulations are being drafted, and which industries may soon come under increased scrutiny. That informational edge alone can translate into higher investment returns.

The second channel is access to corporate information. Corporations naturally seek to curry favor with powerful politicians. While sharing non-public, material information – say, about a research and development breakthrough – is illegal, providing selective updates, strategic context, or executive insights can still shape expectations. And when firms decide whom to brief or court, congressional leaders who can make or break legislation are the most obvious choices.

After they reached leadership roles, lawmakers earned significantly higher returns on trades involving companies that donated to their campaigns or were headquartered in their home states. Leaders’ access to non-public information is a far more plausible explanation for such returns than luck.

Notably, leaders’ returns rose sharply when their party controlled the chamber, suggesting that greater institutional power translates into trading gains. Their stock sales also anticipated regulatory actions, such as Securities and Exchange Commission investigations and congressional hearings, months before they became public knowledge.

These effects were not confined to individual trades. After a leader bought shares in a company, members of their party became more likely to vote for bills that benefited that firm and vote against bills that could harm it. This pattern suggests that, at least in some cases, party discipline may be used to protect leaders’ financial interests.

Even more striking, firms whose stocks leaders purchased received more federal contracts – especially no-bid contracts. In other words, leaders weren’t merely forecasting policy outcomes; they may have been influencing those outcomes in ways that aligned with their investment portfolios.

Once in leadership, lawmakers seemed to develop an uncanny knack for predicting major corporate news: positive announcements tended to follow their stock purchases, and negative developments often followed their sales. Nothing in their pre-leadership records suggested they possessed any such skill.

To be sure, this does not mean that every congressional leader is cashing in on non-public information. But these trends should alarm anyone who cares about fair markets and accountable government.

One promising solution, recently proposed by a bipartisan group of House representatives, is to ban stock trading by sitting members of Congress. Many other democracies already restrict or prohibit legislators from owning individual stocks. The US should do the same. Even in today’s polarized landscape, one principle should be beyond dispute: elected officials should not be playing the markets while writing the rules that govern them.

Shang-Jin Wei, a former chief economist at the Asian Development Bank, is Professor of Finance and Economics at Columbia Business School and Columbia University’s School of International and Public Affairs. 

Copyright Project Syndicate

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