In a new paper,[1] we study the impact on U.S. stock prices of news stories about accusations that several members of Congress traded ahead of private material information about COVID-19. The lawmakers traded stocks during the early stages of the pandemic, in late January through February 2020, prompting concern that they did so in anticipation of COVID-19 having a major impact on the financial markets. Each has said the trades were based on other factors.

The specifics were as follows: Two U.S. senators, Richard Burr and Kelly Loeffler, sold large amounts of stock when U.S. markets were near their peak. Both Burr and Loeffler had received non-public information about the global spread of coronavirus from White House officials, who had been briefing senators regularly for some weeks. The concern was not that either Burr or Loeffler received specific, material, non-public information and then used it to trade specific stock, but rather that their concomitant public assertions of market optimism violated public trust. On February 13, one week before U.S. stocks began sliding, Burr executed 33 trades, selling more than $500,000 worth of shares.[2] Burr and Loeffler may have executed the largest trades (or been associated with the largest trades), but they were by no means the only legislators under scrutiny.[3] For instance, representative Susan Davis has been reported as selling several thousand dollars of shares in Alaska Air and Royal Caribbean Cruise Lines on February 11.[4]

Our task was to identify, among several important dates during COVID-19 in the U.S., the date(s) on which U.S. equity markets demonstrated “abnormal returns.” Our paper examines whether there were abnormal daily stock returns of companies in 49 industries in the United States, around several key dates: 1) the first confirmed U.S. cases (January 20, 2020); 2), the Public Health Emergency of International Concern announcement (January 30, 2020); and 3) the first local transmission case (February 26, 2020). We also supplement our investigation of abnormal returns by confirming that there was genuine investor interest and concern about COVID-19 by tracking relevant Google search history. In this way, while we might intuitively conclude that it would be COVID-19-related announcements driving any identified abnormal returns, we also show that this is so. We find, analyzing Google search activity, that, post January 21, 2020, there was considerable public attention in the U.S. on COVID-19. Further, for the period from January 21 to February 28, levels of this attention are associated with returns in several industries that we subsequently associate with abnormal returns.

Overall, we find little evidence of abnormal returns until February 26, 2020. In other words, the U.S. markets did not react in any identifiably unusual way to the announcement of the first U.S. confirmed cases on January 20, 2020, or to the announcement of the Public Health Emergency of International Concern on January 30, 2020. But the U.S. market did react in an abnormal way in a number of industries that might suffer (or benefit) from the practice of social distancing upon the announcement of the first local transmission case on February 26, 2020. Industries we identify as having particularly strong negative abnormal returns on February 26 include restaurants, hotels, and motels; construction; entertainment; aircraft; utilities; transportation; and coal. The tobacco products industry had a strong positive abnormal return.

In summary, trades by legislators in these industries prior to February 26 are especially appropriate for further scrutiny. Trades prior to February 26 in a number of other industries not listed here might also lend themselves to more nuanced interpretation because these industries evidenced statistically significant cumulative abnormal returns subsequent to February 26, if not statistically significant abnormal returns on exactly February 26, 2020. Results suggest that, at an industry-level, many trades by legislators qualified as being ahead of the market, if not necessarily as insider trading, having been conducted prior to February 26 and involving the industries we identify as having statistically significant abnormal returns.

ENDNOTES

[1] Also published open access by National Institutes of Health; https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7261360/

[2] Blake, Aaron, (2020), “How damning are Richard Burr’s and Kelly Loeffler’s coronavirus stock trades? Let’s break it down”, Washington Post (Washington).

[3] Charges against Loeffler have been dropped, as the trades were deemed conducted by a third-party adviser. In our article, we do not seek to fully explore all legalities of the trades in question. Rather we seek to identify on what dates and in what industries trades could feasibly be regarded as trading ahead of the public investor response. While there are legal issues involving these trades, there are also issues more generally involving how the public will come to regard them.

[4] Sevens, Maggie, and Katy O’Donnell, (2020), “House members, Senate aids traded stocks in early days of coronavirus,” Politico.

This post comes to us from Professor John W. Goodell at The University of Akron and Toan Luu Duc Huynh of the University of Economics Ho Chi Minh City. It is based on their recent paper, “Did Congress trade ahead? Considering the reaction of US industries to COVID-19,” available here.