Political Geography and Stock Returns: The Value and Risk Implications of Proximity to Political Power

79 Pages Posted: 30 Aug 2011 Last revised: 14 Sep 2011

Chansog (Francis) Kim

The State University of New York at Stony Brook

Christos Pantzalis

University of South Florida

Jung Chul Park

University of South Florida

Date Written: August 29, 2011

Abstract

We show that political geography has a pervasive effect on the cross-section of stock returns. We collect election results over a 40-year period and use a political alignment index (PAI) of each state’s leading politicians with the ruling (presidential) party to proxy for local firms’ proximity to political power. Firms whose headquarters are located in high PAI states outperform those located in low PAI states, both in terms of raw returns, and on a risk-adjusted basis. Overall, although we cannot rule out indirect political connectedness advantages as an explanation of the PAI effect, our results are consistent with the notion that proximity to political power has stock return implications because it reflects firms’ exposure to policy risk.

Keywords: Political Geography, Political Connections, Policy Risk, Returns, Performance

JEL Classification: G10, G11, H1

Suggested Citation

Kim, Chansog (Francis) and Pantzalis, Christos and Park, Jung Chul, Political Geography and Stock Returns: The Value and Risk Implications of Proximity to Political Power (August 29, 2011). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1919250

Chansog (Francis) Kim

The State University of New York at Stony Brook ( email )

Stony Brook, NY 11794
United States
248-525-4051 (Phone)
631-632-9412 (Fax)

Christos Pantzalis (Contact Author)

University of South Florida ( email )

Tampa, FL 33620-5500
United States
(813) 974-3262 (Phone)

Jung Chul Park

University of South Florida ( email )

Tampa, FL 33620
United States
813-974-9680 (Phone)
813-974-3084 (Fax)

HOME PAGE: http://www.usf.edu/business/contacts/park-jung-chul.aspx

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