Thursday, October 27, 2005

Stocks And Senators

Last year, I read reports of a study completed by Alan Ziobrowski, a professor at Georgia State.
Ziobrowski and his colleagues looked at six thousand stock transactions made by senators between 1993 and 1998. Over that time, senators beat the market, on average, by twelve per cent annually. Since a mutual-fund manager who beats the market by two or three per cent a year is considered a genius, the politicians’ ability to foresee the future seems practically divine. They did an especially good job of picking up stocks at just the right time; their buys were typically flat before they bought them, but beat the market by thirty per cent, on average, in the year after.
The study's conclusion?
Are senators really that smart? The authors of the study suggest a more likely explanation: at least some senators must have been trading “based on information that is unavailable to the public”—in other words, they were engaged in some form of insider trading. It’s impossible to pin down exactly how it happened, but it’s easy to imagine senators getting occasional stock tips from corporate supplicants, and their own work in Congress often deals with confidential matters that have a direct impact on particular companies.
Now, Bill Frist, the Senate Majority Leader, is under scrutiny due to his selling of stock in the Hospital Corporation of America (HCA) just two weeks before the company reported earnings that fell short of Wall Street's expectations. The stock then fell by nine percent. Frist's brother is on HCA's board of directors. Hmm...