Partisan Return Gap: The Polarized Stock Market in the Time of a Pandemic

Abstract

We document sharp differences in stock price responses to COVID-19-related news between public firms headquartered in blue counties (dominated by Democratic voters) and those in red counties (dominated by Republican voters). Red-county stocks on average experience 18 basis points higher abnormal returns than blue-county stocks on days with important COVID-19 news. We call this the Partisan Return Gap. We find the return gap can be explained by different risk attitudes to-wards COVID between red and blue counties. Using social distancing behavior measured by GPS location data to proxy for people’s attitudes toward COVID-19, we show that individuals in red counties are less concerned about COVID. More importantly, we find that stocks in those counties have higher returns on COVID-19 news days. Exploiting Facebook connections as an identification, we find no strong evidence that the partisan return gap is driven by local economic conditions and policies. Overall, this paper shows that investors’ political leanings affect their attitudes toward COVID-19, resulting in politically polarized stock prices during the pandemic.

Keywords: Stock market, COVID-19, Partisanship, Return gap, Polarization, Social finance, Political finance

JEL Classification: G12, G18, G41