Political Activism, Information Costs, and Stock Market Participation
University of British Columbia
University of Miami - School of Business Administration
May 30, 2012
Journal of Financial Economics (JFE), Forthcoming
This paper examines whether political activism increases people’s propensity to participate in the stock market. Our key conjecture is that politically active people follow political news more actively, which increases their chance of being exposed to financial news. Consequently, their information gathering costs are likely to be lower and the propensity to participate in the market would be higher. We find support for this hypothesis using multiple micro-level datasets, state-level data from the U.S., and cross-country data from Europe. Irrespective of their political affiliation, politically active individuals are 9-25% more likely to participate in the stock market. Using residence in “battleground” states and several other geographic instruments, we demonstrate that greater political activism reduces information gathering costs and causes higher market participation rates. Further, consistent with our conjecture, we find that politically active individuals spend about 30 minutes more on news daily and appear more knowledgeable about the economy and the markets.
Number of Pages in PDF File: 73
Keywords: Stock market participation, political activism, information costs, individual investors, geographic instruments.
JEL Classification: G02, G11, G12Accepted Paper Series
Date posted: March 27, 2011 ; Last revised: June 5, 2012
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