Title: Capitalizing on Capitol Hill: informed trading by hedge fund managers
Abstract: This paper examines the hypothesis that hedge fund managers gain an informational advantage in securities trading through their connections with lobbyists. Using datasets on the long-equity holdings and lobbyist connections of hedge funds from 1999 through 2012, we show that hedge funds outperform passive benchmarks by 56 to 93 basis points per month on their political holdings when they are connected to lobbyists. Furthermore, the political outperformance of connected funds decreased signi cantly after the STOCK Act became e¤ective. Our study provides evidence on the transmission of political information in nancial markets and on the value of such information to nancial market participants. Keywords: Hedge funds; Lobbyists; Informed trading; Performance; Information transfer. JEL Classi cation: G11, G23, G14. We are especially grateful to an anonymous referee for exceptionally thorough readings and constructive suggestions. We thank Vikas Agarwal, Heitor Almeida, Craig Brown, Alex Chinco, Tarun Chordia, Stephen Dimmock, Roger Edelen, Vyacheslav Fos, Andrea Frazzini, Fangjian Fu, Campbell Harvey, Andrew Karolyi, Christopher Malloy, Pedro Matos, Neil Pearson, Joshua Pollet, Je¤rey Ponti¤, Clemens Sialm, Melvyn Teo, Sheridan Titman, Mitch Warachka, Scott Weisbenner, Hao Zhang, as well as conference and seminar participants at the 2010 Financial Research Association annual meeting, the 2011 SFS Finance Cavalcade, the 2012 American Finance Association annual meetings, the Fifth Singapore International Conference on Finance, Baruch College, Drexel University, Georgetown University, Georgia Institute of Technology, Michigan State University, National University of Singapore, Purdue University, Singapore Management University, University of Illinois at Urbana-Champaign, University of Massachusetts Amherst, University of Miami, University of Oregon, University of Texas at Dallas, University of Washington, and Virginia Tech for comments and helpful discussions. We also bene t from conversations with Michael Mayhew at Integrity Research Associates and the team at VogelHood Research who provided valuable insights about the political intelligence industry. We thank Yih-Ling Ang, Zhe Du, Ruidi Huang, Jing Xie, and Sien Yu for excellent research assistance. We retain responsibility for any remaining errors. yCorresponding author. Tel: +1 217 300 7024; fax: +1 217 244 3102. Email addresses: [email protected] (M. Gao), [email protected] (J. Huang).
Publication Year: 2015
Publication Date: 2015-01-01
Language: en
Type: article
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Cited By Count: 1
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