Congress Characteristics, Diversity and Stock Market Outcomes

Abstract

We show that key congress characteristics influence stock market outcomes, and under-diversified congress depresses the performance and upsurge the volatility in the stock market. Our key hypotheses is that congress background influences type, quantity and quality of bills passed, and hence affects policies and budgeting. Our analyses is motivated by the political science literate which demonstrate that women (African American) legislators are more “effective” (liberal) and drive larger focus on women (social) issues, such as Childcare, Educations and Medicare (civil rights and social welfare). This study is critical as we observe key trends in congresses demographic; Congress turns more of: African Americans, Women, experienced, educated; and less of: Whites, Christian Protestants and military background. We then created an index that reflects congress’ level of diversity, and show that the 116th congress (2019) is at 55% diversity, and the stock market positively prices congress diversity. Collectively, the congress’ characteristics are important determinants to consider when we analyze the linkage between politics and finance.

Keywords: Congress characteristics, Political diversity, Political finance, Stock market performance and volatility, Demographic trends, minorities and political involvement; and congress diversity index

JEL Classification: G02, G11, G18