NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Are Political Platforms Capitalized into Equity Prices?

"During periods in 2000 when the prospects of a Bush victory were increasing, Bush-favored firms outperformed Gore-favored firms. Likewise, during periods in which prospects of a Gore victory were increasing, Gore-favored firms outperformed Bush-favored firms."

Financial analysts have long argued that certain industries, such as defense and tobacco, fare better under Republican Administrations, while other industries, such as alternative energy, fare better under Democrats. In Are Policy Platforms Capitalized into Equity Prices? Evidence from the Bush/Gore 2000 Presidential Election (NBER Working Paper No. 10333), author Brian Knight systematically measures these ties between political parties and industries using evidence on equity returns during the six-month period before the 2000 U.S. Presidential election. He studies a sample of 70 firms favored under the policy platforms of either Bush (41 firms) or Gore (29 firms), as identified by financial analyst reports.

For this sample of 70 politically sensitive firms in the United States, Knight confirms that favorable policies play a key role in determining a firm's total value. During periods in 2000 when the prospects of a Bush victory were increasing, Bush-favored firms outperformed Gore-favored firms. Likewise, during periods in which prospects of a Gore victory were increasing, Gore-favored firms outperformed Bush-favored firms. All told, under the Bush administration, relative to a counterfactual Gore administration, Bush-favored firms were worth 3 percent more and Gore-favored firms were worth 6 percent less, representing a transfer of roughly $100 billion from Gore-favored firms to Bush-favored firms. The most sensitive economic sectors include: tobacco, worth 13 percent more under Bush; Microsoft competitors, worth 15 percent less under Bush; and alternative energy companies, worth 16 percent less under Bush.

As a measure of the prospects of a Bush victory, Knight used prices of political futures contracts from the Iowa Electronic Market; prices of these contracts can be interpreted as the probability of a candidate's victory in the election. Data from that Market demonstrate that the 2000 race was extremely close throughout the six months preceding the election. In addition, the author shows that these futures contract prices moved in tandem with public opinion tracking polls.

As an alternative to the analyst reports identifying Bush and Gore stocks, the author also incorporated data on campaign contributions. During the 2000 campaign, corporations made both hard money contributions to candidates, through their political action committees (PACs), and soft money contributions, directly from their treasuries to political parties. Firms in traditionally Republican industries tended to give more to Bush, while firms in traditionally Democratic industries gave more to Gore. The results from this campaign contribution analysis are consistent with baseline results; firms giving more to Bush outperformed firms giving to Gore during periods in which the prospects of a Bush victory were increasing and under-performed during periods in which Gore's prospects improved.

The author's findings demonstrate that prospective future policies are reflected in equity prices during the electoral process. This result is surprising given that candidate platforms are not actually legislatively enacted until months, or even years, after the election of candidates to office.

-- Les Picker


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