Abstract

http://ssrn.com/abstract=1572801
 
 

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Government Spending, Political Cycles and the Cross Section of Stock Returns


Frederico Belo


University of Minnesota; National Bureau of Economic Research (NBER)

Vito Gala


London Business School

Jun Li


University of Texas at Dallas

October 9, 2011


Abstract:     
Using a novel measure of industry exposure to government spending, we document predictable variation in cash flows and stock returns over political cycles. During Democratic presidencies, firms with high government exposure experience higher cash flows and stock returns, while the opposite pattern holds true during Republican presidencies. Business cycles, firm characteristics, and standard risk factors do not account for the pattern in returns across presidencies. An investment strategy that exploits the presidential cycle predictability generates abnormal returns as large as 6.9 percent per annum. Our results suggest market under reaction to predictable variation in the effect of government spending policies.

Number of Pages in PDF File: 54

Keywords: Cross-Sectional Asset Pricing, Government Spending, Political Cycles, Input-Output Analysis.

JEL Classification: D57, E6, G18, G12, H50

working papers series


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Date posted: March 19, 2010 ; Last revised: October 10, 2011

Suggested Citation

Belo, Frederico and Gala, Vito and Li, Jun, Government Spending, Political Cycles and the Cross Section of Stock Returns (October 9, 2011). Available at SSRN: http://ssrn.com/abstract=1572801 or http://dx.doi.org/10.2139/ssrn.1572801

Contact Information

Frederico Belo (Contact Author)
University of Minnesota ( email )
19th Avenue South
Minneapolis, MN 55455
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Vito D. Gala
London Business School ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
Jun Li
University of Texas at Dallas ( email )
800 West Campbell Road, SM 31
Richardson, TX 75080
United States
972-883-4422 (Phone)
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