54 Pages Posted: 19 Mar 2010 Last revised: 10 Oct 2011
Date Written: October 9, 2011
Using a novel measure of industry exposure to government spending, we document predictable variation in cash flows and stock returns over political cycles. During Democratic presidencies, firms with high government exposure experience higher cash flows and stock returns, while the opposite pattern holds true during Republican presidencies. Business cycles, firm characteristics, and standard risk factors do not account for the pattern in returns across presidencies. An investment strategy that exploits the presidential cycle predictability generates abnormal returns as large as 6.9 percent per annum. Our results suggest market under reaction to predictable variation in the effect of government spending policies.
Keywords: Cross-Sectional Asset Pricing, Government Spending, Political Cycles, Input-Output Analysis.
JEL Classification: D57, E6, G18, G12, H50
Suggested Citation: Suggested Citation
Belo, Frederico and Gala, Vito and Li, Jun, Government Spending, Political Cycles and the Cross Section of Stock Returns (October 9, 2011). Available at SSRN: https://ssrn.com/abstract=1572801 or http://dx.doi.org/10.2139/ssrn.1572801