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Public Choice

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01.10.2013

On political connectedness and the arrest of Ivan Boesky

verfasst von: Charles R. Knoeber, Mark D. Walker

Erschienen in: Public Choice | Ausgabe 1-2/2013

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Abstract

The bombshell arrest of Ivan Boesky on November 14, 1986 signaled the intention of then-US attorney for the southern district of New York, Rudy Giuliani, to increase enforcement of laws against insider trading. Looking at concurrent stock price changes, we find that New York companies were affected especially. More interestingly, New York firms with active political arms fared better than those without them; and New York firms connected to Mr. Giuliani’s Republican Party fared better still. We find no such effects for non-New York firms. These findings suggest that political connectedness was valuable in the era of more rigorous legal enforcement associated with Mr. Giuliani’s attack on insider trading.

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See Fischel (1995) in general, and in Chap. 4, in particular, for an entertaining and well-written account.

Similar arguments relating political connectedness to stock price have been made for election events (see for example, Goldman et al. 2009) and for changes in political power (see Jayachandran 2006).

For a useful commentary and collection of papers, see McChesney and Shughart (1995). Like the present paper, Yu and Yu (2011) provides evidence of a similar link between political connectedness and enforcement outside of antitrust. They find that firms engaged in fraud during the 1998–2005 period that also lobby are about 40 % less likely to be detected than similar firms that do not lobby. Moreover, when detected, lobbying delays the time to detection by about four months.

Our analysis is similar to that of recent papers that have examined the wealth effects of the implementation of Sarbanes-Oxley Act (SOX). For example, see Li et al. (2008), who use raw returns adjusted by a constant (which extracted a 2002 trend).

The Fama-French factors are constructed using value-weighted portfolios partitioned on book-to-market and size. SMB is the average return of the small portfolio relative to the big portfolio. HML is the average return of the high book-to-market portfolio relative to the low book-to-market portfolio. MKT-RF is the value-weighted return on all CRSP stocks relative to the one-month t-bill rate. See Carhart (1997) for a definition of the momentum factor (UMD). See Fama and French (1992, 1993) for definitions of MKT-RF, SMB, and HML.

Our results are substantially the same if we exclude the momentum factor.

This is consistent with the SEC’s announcement of its investigation into insider trading, an event not specific to New York firms, as having little impact.

We also estimated model 3 with long-short portfolio excess returns, using only the two key days, Monday and Wednesday, for our indicator variable. The coefficient for the Monday and Wednesday indicator variable is −0.0023 and has a t-statistic of −3.36 (p-value of .001).

For example, see Jayachandran (2006), Goldman et al. (2009) and Cooper et al. (2010).

We thank Brett Myers and Alexi Ovtchinnikov for allowing us to utilize their data. The data set covers political contributions to candidates for US Congress.

Browning-Ferris Industries donated to an equal number and in equal amounts to Republican and Democrat politicians.

We re-estimated the models in Table 3 using only returns for the two days (Monday and Wednesday) as the dependent variable. The results for all models are similar in magnitude and retain statistical significance.

For example, see Faccio (2006) and Faccio et al. (2006).

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Titel: On political connectedness and the arrest of Ivan Boesky
verfasst von: Charles R. Knoeber
Mark D. Walker
Publikationsdatum: 01.10.2013
Verlag: Springer US
Erschienen in: Public Choice / Ausgabe 1-2/2013
Print ISSN: 0048-5829
Elektronische ISSN: 1573-7101
DOI: https://doi.org/10.1007/s11127-012-9939-7

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