Partisanship, Optimism, and Firm Innovation

Abstract

Political partisanship influences firm executives’ beliefs about the future economy. We find that firms with partisan aligned managers with the U.S. president have more patents, more patent citations, and higher patent value. We establish causality using a difference-in-differences approach and an instrumental variable estimation around the U.S. presidential elections. This effect is amplified when firms have overconfident CEOs and during the periods of high policy uncertainty, suggesting that partisan optimism stimulates innovation incentives. Firms with partisan aligned managers generate patents with greater originality, generality, and exploratory style. Innovative industries and competitive industries are particularly affected by firm executives’ partisan perceptions.

Keywords: Partisanship, partisan alignment, innovation, optimism

JEL Classification: P16, G32, D72