Negative Trading in Congress

We investigate negative trading, such as short selling, by members of Congress. We find, based on a new comprehensive dataset of trades by members of Congress, that negative trading not only is common, but also is associated with positive abnormal financial returns. Simply put, members of Congress make money when they bet on stock price drops. In contrast, we do not find a similar association for long positions taken by members of Congress.

In other words, there is an asymmetry between “positive” versus “negative” congressional trading. This asymmetry has multiple implications for public policy. Our main message is that proposals to regulate congressional trading should reflect key differences between positive and negative trading, and we show how current approaches fail to do so. Depending on how one balances efficiency against fairness concerns, negative trading by members of Congress could be more lightly regulated, or even promoted rather than suppressed.

Our empirical evidence also suggests that disclosure rules should distinguish among individual stocks, mutual funds, and stock options. Finally, our results support the academic critique of Tobin’s Q as an unreliable measure of firm value.