Stock ownership US Congress influenced voting on bailout

Mar 29, 2010

(PhysOrg.com) -- Personal investments in the stock of financial institutions by members of the House of Representatives and the Senate of the Unites States was positively associated with these institutions receiving bailout after the subprime mortgage crisis of 2007.

Stock ownership in the financial sector by politicians increased the probability that banks received bailout money, how much support these institutions received and how quickly.

Professor Laurence van Lent of Tilburg University in the Netherlands and Ahmed Tahoun of Manchester Business School (UK) drew these conclusions on the basis of an analysis of 555 publicly listed financial sector firms, 295 of which received government support under the Troubled Asset Relief Program (TARP).

Lobbying is indubitably an important means of exerting influence in politics. In the United States, campaign donations also matter. What has gone virtually unnoticed thus far though is that politicians also are investors. Part of their wealth rests with firms whose wellbeing falls under their legislative and regulatory influence.

Professor of Business Laurence van Lent and his colleague Ahmed Tahoun have now systematically shown for the first time that equity ownership of politicians plays a significant role in their legislative and oversight activities. In particular, was associated with members of the House of Representatives voting in favor of the H.R. 3997 bill on September 29th and H.R. 1424 on October 3rd, 2008 to bailout the financial sector. In the initial vote, the predicted probability of voting for the bailout proposals is 41 percent for non-investors and 58 percent for equity owners. In the final vote, the predicted probabilities are 55 and 69 percent respectively.

Congressional equity ownership in a given firm was also shown to affect the probability of receiving a bailout, the bailout amount and the timing of government support to that firm. Due to their oversight of the Treasury’s implementation of TARP policy, congressional committees with jurisdiction over the finance sector can potentially affect regulatory outcomes. The researchers show that the equity ownership of members of these congressional committees is indeed associated with bailout decisions. It turns out that this effect can be attributed largely to the powerful members in each committee, i.e., the chairs and ranking members.

Explore further: Facial selection technique for ads can increase buyers by 15 percent

More information: The working paper about this study can be downloaded from the Social Science Research Network at papers.ssrn.com/sol3/papers.cfm?abstract_id=1570219

Provided by Tilburg University

5 /5 (17 votes)
add to favorites email to friend print save as pdf

Related Stories

Banks and bailouts: Playing politics?

Dec 21, 2009

(PhysOrg.com) -- Banks with strong political connections were more likely to receive bailout money from the government—and more of it—in the past year than those with weaker ties, say University of Michigan researchers.

Green firms rewarded by financial markets

May 29, 2008

When a company improves its environmental performance, it is common to think that the accompanying economic improvements are based on the company's more efficient use of resources. However,

Firm location determines equity issuance

Jun 24, 2008

[B]Seasoned equity offerings less common for rural firms[/B] A new study in the journal Financial Management reveals that firms in rural areas are less likely to issue equity than firms in urban areas. In addition, rural firm ...

Recommended for you

Sharing = Stealing: Busting a copyright myth

Apr 11, 2014

Consumers copy and share digital files. This has been blamed for a potentially catastrophic decline in certain markets. But why do consumers copy? And is it as economically harmful as often thought?

How widespread is tax evasion?

Apr 10, 2014

Tax evasion is widely assumed to be an eternal problem for governments—but how widespread is it? For the first time, a new study, co-authored by an MIT professor, has put a cost on a particular kind of tax evasion, known ...

China looks to science and technology to fuel its economy

Apr 10, 2014

Maintaining stability in the face of rapid change and growth, and proactively partaking in cooperative global ties in science and technology fields will be key in helping China become an innovation-based economy, according ...

User comments : 5

Adjust slider to filter visible comments by rank

Display comments: newest first

El_Nose
not rated yet Mar 29, 2010
Maybe if the prof -- with all due respect -- understood a little more on A) American political structure and B) the TARP - he would understand that while the money was approved by the Congress the distribution of the funds was handled by two different bodies - It was designed with the help of the Federal Reserve, and ovberseen by the department of the Treasury.

It was mandated that all banks at risk receive money. It was recommended that if some banks chose not to accept then they would be seen as stronger and the ones taking it as weaker and the weaker banks would fail .. guilt by association.

While the congress acted as the oversight committee no one allowed them to actually make decisions on this -- we american's are dumb but give us some credit -- the congress let the Fed and treasury handle the business and then scrutinized every decision.

Yeah - it could have been done better -- but when your economy makes up 45% of the world's GPD you make some tough calls.
El_Nose
not rated yet Mar 29, 2010
Th arrogance of suggesting the enitre congress was voting with bank accounts in mind is utterly rediculous...

Could some of the members been this way - sure NO Doubt -- but all -- no we were all told from the US to Germany to France to the UK Japan and even China that a rapid injection of money into the system was the fastest way to cure this crises. We tried taking money out of the system the last time this happened -- in America it was called the Great Depression -- Europe - no offense - was already in a state of depression from WWI at the time and had been there for 10 years already.
Roj
not rated yet Mar 30, 2010
This study is well suited for peer review. Without much interpretation, much less value judgment, the source of public data and statistical method was reported as a correlation of stakeholders favoring TARP by an extra 13%.

The reader is free to decide if this study's reliance on public records adequately accounts for all financial interests legislators had in private corporations receiving TARP bailouts.

And, if an extra 13% correlation is statistically significant, however understated that percetage may be, by relying on public records.

What impressed me, was how a professor from Holland and a grad student from the UK could so easily spot a standard measurement for "conflict of interest" and corporate hegemony, from across the Atlantic ocean.
frajo
not rated yet Mar 30, 2010
Th arrogance of suggesting the enitre congress was voting with bank accounts in mind is utterly rediculous...
I don't find any such suggestion in the article. They are talking of probabilities and correlations only.
Arkaleus
5 / 5 (2) Mar 30, 2010
"Tyranny is not a matter of minor theft and violence, but of wholesale plunder, sacred and profane, private or public. If you are caught committing such crimes in detail you are punished and disgraced; sacrilege, kidnapping, burglary, fraud, theft are the names we give to such petty forms of wrongdoing. But when a man succeeds in robbing the whole body of citizens and reducing them to slavery, they forget these ugly names and call him happy and fortunate, as do all others who hear of his unmitigated wrongdoing."

From Plato's "The Republic"

More news stories

Online reviews: When do negative opinions boost sales?

When purchasing items online, reading customer reviews is a convenient way to get a real-world account of other people's opinions of the product. According to a new study in the Journal of Consumer Research, negative review ...

Low Vitamin D may not be a culprit in menopause symptoms

A new study from the Women's Health Initiative (WHI) shows no significant connection between vitamin D levels and menopause symptoms. The study was published online today in Menopause, the journal of The North American Menopa ...

Astronomers: 'Tilt-a-worlds' could harbor life

A fluctuating tilt in a planet's orbit does not preclude the possibility of life, according to new research by astronomers at the University of Washington, Utah's Weber State University and NASA. In fact, ...