Political Ties and Predictable Returns

54 Pages Posted: 20 Dec 2018

See all articles by Siyi Shen

Siyi Shen

The Chinese University of Hong Kong, Shenzhen - School of Management and Economics

Date Written: November 15, 2018


This paper demonstrates the importance of inter-firm political links, measured by common campaign contributions made by firm executives. Price movements of a firm’s stock are predictable based on stock price movements of connected firms. Cross-predictability is strongest among politically connected firms that operate in different states and sectors, suggesting that inter-firm political links are largely overlooked due to limited investor attention. To probe the underlying mechanism, I present evidence suggesting that common sources of political exposure across firms ex-ante cannot alone explain this relationship; instead, political ties play the key role, further synchronizing ex-post political agendas. Using the 2010 Citizens United v. FEC decision as an exogenous shock, I find that cross-predictability is weaker for firms that are restricted from actively engaging in political campaigns. Long-short stock portfolios based on political ties yield risk-adjusted returns of 4%-5% per annum.

Keywords: Polical ties, return cross-predictability, inattention, political exposure

JEL Classification: G10, G11, G14

Suggested Citation

Shen, Siyi, Political Ties and Predictable Returns (November 15, 2018). Available at SSRN: https://ssrn.com/abstract=3292672 or http://dx.doi.org/10.2139/ssrn.3292672

Siyi Shen (Contact Author)

The Chinese University of Hong Kong, Shenzhen - School of Management and Economics ( email )

2001 Longxiang Road, Longgang District
Shenzhen, 518172

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