Political Activism, Information Costs, and Stock Market Participation

73 Pages Posted: 27 Mar 2011 Last revised: 5 Jun 2012

See all articles by Yosef Bonaparte

Yosef Bonaparte

University of Colorado at Denver - Department of Finance

Alok Kumar

University of Miami - School of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: May 30, 2012

Abstract

This paper examines whether political activism increases people’s propensity to participate in the stock market. Our key conjecture is that politically active people follow political news more actively, which increases their chance of being exposed to financial news. Consequently, their information gathering costs are likely to be lower and the propensity to participate in the market would be higher. We find support for this hypothesis using multiple micro-level datasets, state-level data from the U.S., and cross-country data from Europe. Irrespective of their political affiliation, politically active individuals are 9-25% more likely to participate in the stock market. Using residence in “battleground” states and several other geographic instruments, we demonstrate that greater political activism reduces information gathering costs and causes higher market participation rates. Further, consistent with our conjecture, we find that politically active individuals spend about 30 minutes more on news daily and appear more knowledgeable about the economy and the markets.

Keywords: Stock market participation, political activism, information costs, individual investors, geographic instruments.

JEL Classification: G02, G11, G12

Suggested Citation

Bonaparte, Yosef and Kumar, Alok, Political Activism, Information Costs, and Stock Market Participation (May 30, 2012). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1791330 or http://dx.doi.org/10.2139/ssrn.1791330

Yosef Bonaparte

University of Colorado at Denver - Department of Finance ( email )

United States

Alok Kumar (Contact Author)

University of Miami - School of Business Administration ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

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