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 ab-normal returns than blue-county stocks on days with important COVID-19 news. We call this the Par-tisan Return Gap. We find the return gap can be explained by different risk attitudes towards COVID (measured by social distancing behavior) between red and blue counties. 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