Political Uncertainty and Institutional Herding
38 Pages Posted: 19 Jul 2021 Last revised: 13 Apr 2023
Date Written: April 1, 2023
Abstract
Political uncertainty represents a key determinant of corporate investment decisions. In this paper, we study the relation between political uncertainty and investment from the perspective of institutional investors. Using U.S. equity holdings data from 13F filings, we find that institutional investors herd during politically uncertain times. This trading behavior is especially strong when U.S. presidents are unpopular, due to their proclivity for controversial policies, and among riskier stocks. We also find that this mechanism helps impound a risk premium into stock prices, thus improving market efficiency. Overall, the findings unveil a new channel through which political uncertainty affects financial markets.
Keywords: Herding, institutional investors, political uncertainty, presidential popularity.
JEL Classification: G11, G18, G23.
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