Exposure of Firms to European Integration and the Role of National Policy Positions

Abstract

This paper uses information from political parties’ election programs to demonstrate how attitudes toward European integration affect domestic firms’ stock performance as indicated by abnormal returns surrounding 91 parliamentary elections in 20 EU countries. Interaction effects between political parties’ policy positions and firm-specific characteristics significantly affect the heterogeneity of stock price responses. Firms’ share of foreign sales and exposure to the tradable sector have a positive, and capital intensity a negative effect on the market response if the elected parties are in favor of European integration. Conversely, if political support of European integration is weak, firm size has a positive effect, whereas the foreign sales ratio is negatively associated with the market response. Controlling for parties’ positions on a set of single-issue categories provides a more nuanced view of the different policy risks than does the broad right-left measure employed in existing studies.

Keywords: European integration, policy positions, stock pricing, elections, event study

JEL Classification: D72, G12, G14, G18, F15, F50