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Political Bias and Corporate Outcomes

Paper Session

Sunday, Jan. 5, 2025 1:00 PM - 3:00 PM (PST)

San Francisco Marriott Marquis, Foothill F
Hosted By: Association for Comparative Economic Studies
  • Chair: Dean Ryu, University of Oxford

Political Attitudes and Equity Market Reactions to Vaccine Mandate Bans

Michael Cooper
,
University of Utah
Fan Li
,
University of Utah
Tim Liu
,
University of Utah
Yihui Pan
,
University of Utah

Abstract

We study equity market reactions to state laws banning COVID-19 vaccine mandate bans and find a 0.64% increase in abnormal returns to affected firms around law passage, compared to unaffected firms. The positive market reaction concentrates in firms with a Republican workforce, especially if they face tight local labor markets or have Democratic leadership, while firms with a Democratic workforce experience
mildly negative market reactions. Establishments impacted by vaccine mandate bans experience greater employment growth after the passage of the bans within the same firm, an effect concentrated in firms with a Republican workforce. Our findings highlight the importance of workers’ non-monetary preferences on labor-related outcomes and suggest that regulations aligned with workers’ preferences may ameliorate labor adjustment costs to the benefit of firm value.

Divided Government and the Stock Market

Theofanis Papamichalis
,
University of Cambridge
Dean Ryu
,
University of Oxford
Mungo Wilson
,
University of Oxford

Abstract

We show that during United governments—when a single political party controls the White House, Senate, and House of Representatives—the U.S. stock market generates significantly higher average excess returns, and the economy experiences stronger growth compared to periods of Divided government. This government cycle is also observed at the U.S. state level and in the United Kingdom, underscoring its widespread and generalizable nature. The effects of political gridlock during divided governments are particularly pronounced for small firms, helping to explain the recent disappearance of the firm size premium. By analyzing closely contested elections, we identify causal mechanisms and show that the government cycle aligns with theoretical models linking increased political uncertainty to underperformance during Divided-Republican governments.

Does Partisanship Affect Mutual Fund Information Processing? Evidence from Textual Analysis on Earnings Calls.

Wanyi Wang
,
Babson College

Abstract

This paper studies how partisanship affects mutual fund information processing at the firm level. Using textual analysis of earnings call transcripts, I identify discussions on partisan-sensitive topics, such as climate change, pandemic, and healthcare. I find that partisan funds react more strongly to topics aligned with their ideological beliefs and trade more after firms increase discussions on these topics. The effect is stronger for funds with higher polarization levels and for firms with larger weights in fund portfolios. Moreover, the observed pattern does not add value to fund performance, suggesting that the effect is not driven by rational expectations about future stock returns. Overall, these findings indicate that partisanship plays a role in mutual fund firm-level information processing.

The Invisible Handshake: State Pensions and Corporate Political Contributions

Jingshu Wen
,
University of Oxford
Fan Zhang
,
Bentley University

Abstract

The Supreme Court loosened soft money restrictions in 2010, which enabled corporations to donate unlimited amounts to super PACs, or independent expenditur-eonly political committees. We investigate how the loosening of soft money restrictions affects a form of political rent-seeking where politicians influence state pension funds to obtain campaign donations. We find that listed firms with higher state pension ownership donate more to politicians from the state. One percentage point increase in state pension
ownership is associated with a 25.37 percentage point increase in corporate donations to state officials and committees. However, firm and pension performance deteriorates afterward. These effects are stronger for states with higher corruption indexes, for firms with worse corporate governance, for donations to super PACs, and after 2010. Exploiting state-level variation on soft money restrictions, our difference-in-differences tests suggest that campaign finance freedom exacerbates rent-seeking and reduces social welfare.
JEL Classifications
  • G1 - General Financial Markets
  • N1 - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations