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A Dilemma of Self-interest vs. Ethical Responsibilities in Political Insider Trading

Author

Listed:
  • Jan Hanousek

    (Muma College of Business, University of South Florida
    Mendel University)

  • Hoje Jo

    (Santa Clara University)

  • Christos Pantzalis

    (Muma College of Business, University of South Florida)

  • Jung Chul Park

    (Muma College of Business, University of South Florida)

Abstract

Political insider trading has brought substantial attention to ethical considerations in the academic literature. While the Stop Trading on Congressional Knowledge (STOCK) Act prohibits members of Congress and their staff from leveraging non-public information to make investment decisions, political insider trading still prevails. We discuss political ethics and social contract theory to re-engage the debate on whether political insider trading is unethical and raises the issues of conflict of interest and social distrust. Empirically, using a novel measure of information risk, we find that senator trades are associated with substantially high levels of information asymmetry. Moreover, based on inside political information, senators earn significant market-adjusted returns (4.9% over 3 months). Thus, our results do not support the prediction made by social contract theory and thereby provide a potential resolution to the ongoing debate on banning stock trading for members of Congress.

Suggested Citation

  • Jan Hanousek & Hoje Jo & Christos Pantzalis & Jung Chul Park, 2023. "A Dilemma of Self-interest vs. Ethical Responsibilities in Political Insider Trading," Journal of Business Ethics, Springer, vol. 187(1), pages 137-167, September.
    • Handle: RePEc:kap:jbuset:v:187:y:2023:i:1:d:10.1007_s10551-022-05265-0
    DOI: 10.1007/s10551-022-05265-0
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    More about this item

    Keywords

    Politician’s insider trading; STOCK Act; Social contract theory;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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