Sunday, October 7, 2012: 9:20 AM
Andreas Oehler, Ph.D.
,
Finance, Bamberg University, Bamberg, Germany
Thomas J. Walker, Ph.D.
,
Concordia University, Montreal, QC, Canada
Stefan Wendt, Dr.
,
Department of Finance, Bamberg University, Bamberg, Germany
Objectives: Election results may influence corporate performance by general changes in government spending and tax changes initiated by the new government. On the other hand, specific companies or sectors might benefit or suffer from sector-specific governmental decisions. In the general debate the latter effect is typically related to partisanship. Stock market participants will price their expectations about political change into stock prices prior to an election and adjust their opinion according to the actual political decision making after the election took place. To date, however, it is largely unclear how the U.S. stock market actually reacts to changes in the political landscape and whether these effects persist over several elections. This means that we do not know whether both the Republican (GOP) and Democratic parties are associated with particular election-related stock price effects for certain companies and/or sectors. Our study attempts to fill this gap. To our knowledge this is the first analysis of potential partisanship of the two major political parties over a horizon that spans four decades.
Data/Methods: Using event study methodology we analyze abnormal stock price returns around the nine U.S. presidential elections from 1976 to 2008. Specifically, we focus on party-specific biases/favoritism. We use Wharton Research Data Services (WRDS) to retrieve daily stock return data and the respective company characteristics. Abnormal stock price returns are calculated using the four-factor model established by Carhart (1997). In addition, we run a regression analysis in order to determine whether the market perceives any persistent biases of the Democratic and/or Republican parties towards certain industries.
Results: The results demonstrate statistically significant (positive or negative) cumulative abnormal stock price returns for most industries, in particular in the longer run. Most effects, however, appear to be related to the individual presidents rather than to one of the two political parties. In addition, stock markets seem to primarily reflect (expected and actual) changes in political decision making per se irrespective of the underlying political ideology.
