Interest Group Activity and Long-Run Stock Market Performance

Abstract

This paper provides evidence that interest group activity is negatively related to both the level and the volatility of returns on a national stock market. These findings are robust to model specifications that include traditional growth regression policy variables as well as political, economic, and financial institutions variables. The estimated magnitude of the relationship between interest group activity and stock market performance is quite striking. In particular, a one percent increase in the number of interest groups in a country is associated with a direct reduction in average annual stock market returns of roughly 2-5%, and a reduction in the volatility of annual stock returns of roughly 6-14%. The findings also indicate that many of the same fundamentals that drive economic growth also explain stock market performance.

Keywords: Special interest groups, institutional sclerosis, stock returns, return volatility

JEL Classification: C21, D72, G15, O16