Do Corporate Insiders Take Advantage of Their Political Connections? Evidence from Insider Trading

Using corporate insiders’ employment data, I study the impact of political connections on corporate insiders’ trading behavior. I find that purchases (sales) by politically connected corporate insiders are associated with lower (higher) abnormal returns compared with non-politically connected insiders, indicating that politically connected insiders in general are sophisticated and cautious about potential legal risk. This effect is more significant among purchases. I also find that politically connected insiders are more likely to have longer trading horizons, and more likely to make routine trades. The Stop Trading on Congressional Knowledge (STOCK) Act passed in April 2012 effectively decreases (increases) the abnormal returns associated with insider purchases (sales) made by Congress members and staff in short horizons.