Partisanship and Portfolio Choice: Evidence from Mutual Funds
47 Pages Posted: 6 Dec 2021
Date Written: December 5, 2021
Abstract
Political beliefs matter for the behavior of institutional investors. Contrary to conventional wisdom, we show that whether a mutual fund team is Republican or Democratic has a first-order effect on the fund’s portfolio choice. Before and after the 2016 Presidential election, Republican teams actively purchase more equity, especially in high beta industries. Around the 2020 election, Democratic teams do the same. The flip in trading behavior rules out conventional risk aversion-based explanations for the role of partisanship. Instead, political beliefs appear to drive this trading, with managers appearing more optimistic when their political party wins the presidency. These effects are also present in 2012 but have grown over time.
Keywords: Political Economy, Asset Pricing
JEL Classification: G23, G11, G12
Suggested Citation: Suggested Citation