From K Street to Wall Street: Political Connections and Stock Recommendations

Author:

Christensen Dane M.1,Mikhail Michael B.2,Walther Beverly R.3,Wellman Laura A.4

Affiliation:

1. University of Oregon

2. University of Illinois at Chicago

3. Northwestern University

4. The University of Utah

Abstract

ABSTRACTIn this study, we examine whether sell-side security analysts gain access to value-relevant information through political connections. We measure analysts' political connections based on political contributions at the brokerage-house level. We argue that if brokerages are able to obtain private information through their political connections, then analysts at politically connected brokerages should issue more profitable stock recommendations, and this increased profitability should be more pronounced for politically sensitive stocks. Our evidence is consistent with these predictions. Analyses of recommendations issued surrounding the Affordable Care Act further support our main inferences. Moreover, our findings hold after we employ numerous tests to address correlated omitted variables and endogeneity. Collectively, these results suggest that brokerages obtain value-relevant, nonpublic information from their political connections.JEL Classifications: G24; G38; G14.

Publisher

American Accounting Association

Subject

Economics and Econometrics,Finance,Accounting

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