Government Spending, Political Cycles and the Cross Section of Stock Returns
University of Minnesota; National Bureau of Economic Research (NBER)
London Business School
University of Texas at Dallas
October 9, 2011
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, H50working papers series
Date posted: March 19, 2010 ; Last revised: October 10, 2011
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo7 in 0.406 seconds