Person:

Malloy, Christopher

We demonstrate that personal connections amongst U.S. politicians have a significant impact on Senate voting behavior. Networks based on alumni connections between politicians are consistent predictors of voting behavior. We estimate sharp measures that control for common characteristics of the network, as well as heterogeneous impacts of a common network characteristic across votes. We find that the effect of alumni networks is close to 60% as large as the effect of state-level considerations. The network effects we identify are stronger for more tightly linked networks, and at times when votes are most valuable. We show that politicians use school ties as a mechanism to engage in vote trading ("logrolling"), and that alumni networks help facilitate the procurement of discretionary earmarks.

We demonstrate that legislation has a simple, yet previously undetected impact on stock prices. Exploiting the voting record of legislators whose constituents are the affected industries, we show that the votes of these "interested" legislators capture important information seemingly ignored by the market. A long-short portfolio based on these legislators' views earns abnormal returns of over 90 basis points per month following the passage of legislation. Industries that we classify as beneficiaries of legislation experience significantly more positive earnings surprises and positive analyst revisions in the months following passage of the bill, as well as significantly higher future sales and profitability. We show that the more complex the legislation, the more difficulty the market has in assessing the impact of these bills; further, the more concentrated the legislator's interest in the industry, the more informative are her votes for future returns.