Political Uncertainty and Institutional Herding

38 Pages Posted: 19 Jul 2021 Last revised: 13 Apr 2023

See all articles by Konstantinos Gavriilidis

Konstantinos Gavriilidis

Stirling Management School; University of Stirling

Vasileios Kallinterakis

UNIVERSITY OF LIVERPOOL

Maurizio Montone

Utrecht University

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.

Suggested Citation

Gavriilidis, Konstantinos and Gavriilidis, Konstantinos and Kallinterakis, Vasileios and Montone, Maurizio, Political Uncertainty and Institutional Herding (April 1, 2023). Available at SSRN: https://ssrn.com/abstract=3887409 or http://dx.doi.org/10.2139/ssrn.3887409

Konstantinos Gavriilidis

Stirling Management School ( email )

Stirling University
Stirling, sTIRLING FK9 4LA
United Kingdom

University of Stirling ( email )

Stirling, Scotland FK9 4LA
United Kingdom

Vasileios Kallinterakis (Contact Author)

UNIVERSITY OF LIVERPOOL ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

HOME PAGE: http://https://www.liverpool.ac.uk/management/staff/vasileios-kallinterakis/

Maurizio Montone

Utrecht University ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

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