Political Geography and Stock Returns: The Value and Risk Implications of Proximity to Political Power

Abstract:     
We show that political geography has a pervasive effect on the cross-section of stock returns. We collect election results over a 40-year period and use a political alignment index (PAI) of each state’s leading politicians with the ruling (presidential) party to proxy for local firms’ proximity to political power. Firms whose headquarters are located in high PAI states outperform those located in low PAI states, both in terms of raw returns, and on a risk-adjusted basis. Overall, although we cannot rule out indirect political connectedness advantages as an explanation of the PAI effect, our results are consistent with the notion that proximity to political power has stock return implications because it reflects firms’ exposure to policy risk.

Number of Pages in PDF File: 79

Keywords: Political Geography, Political Connections, Policy Risk, Returns, Performance

JEL Classification: G10, G11, H1

Accepted Paper Series