Partisan Return Gap: The Polarized Stock Market in the Time of a Pandemic
65 Pages Posted: 25 Mar 2021 Last revised: 27 Sep 2021
Date Written: September 25, 2021
Using two proxies for investors’ political affiliation, we document sharp differences in stock returns between firms likely dominated by Democratic investors (blue stocks) and those dominated by Republican investors (red stocks) during the COVID pandemic. Red stocks have 20 basis points higher risk-adjusted returns than blue stocks on COVID news days (Partisan Return Gap). Lockdown policies, COVID cases, industry and firm fundamentals only explain at most 25% of the return gap. Polarized political beliefs about COVID, revealed through people’s social distancing behaviors and their Stock-Twits, contribute to about 40% of the return gap beyond the fundamental channel. Our paper provides partisanship as a novel aspect in understanding abnormal stock returns during the pandemic.
Keywords: Partisanship, Stock returns, Pandemic, COVID-19, Political polarization, Political finance, Social finance
JEL Classification: G12, G18, G41
Suggested Citation: Suggested Citation