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

56 Pages Posted: 25 Mar 2021 Last revised: 27 Apr 2021

See all articles by Jinfei Sheng

Jinfei Sheng

University of California, Irvine - Paul Merage School of Business

Zheng Sun

University of California, Irvine - Paul Merage School of Business

Wanyi Wang

University of California, Irvine - Paul Merage School of Business

Date Written: April 27, 2021

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

Suggested Citation

Sheng, Jinfei and Sun, Zheng and Wang, Wanyi, Partisan Return Gap: The Polarized Stock Market in the Time of a Pandemic (April 27, 2021). Available at SSRN: https://ssrn.com/abstract=3809575 or http://dx.doi.org/10.2139/ssrn.3809575

Jinfei Sheng (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

4291 Pereira Dr
Irvine, CA 92697
United States

HOME PAGE: http://sites.google.com/site/shengjinfei/

Zheng Sun

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States

Wanyi Wang

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA 92697-3125
United States

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