Presidential-Partisan Cycles and the Cross-Section of Stock Returns

Abstract

From 1926 to 2020, average excess stock return differentials between Democratic and Republican presidencies were positive for more than two-thirds of publicly traded US firms, averaging about 12% per annum across all firms. Democratic presidents outperform their Republican counterparts primarily for unprofitable, illiquid, inefficient, distressed, and financially constrained small and medium-sized enterprises. Democratic presidencies notably more favorably impact firms in the oil and telecommunications industries, while gun-related firms thrive under Republican presidencies. Presidential politics appears less relevant to large corporations or information asymmetries mitigation and to how investors value capital assets or how firms make their investment and financing decisions.

Keywords: Presidential-partisan cycles; Firm performance; Partisan theory; Firm characteristics; Industrial makeup; Small and medium-sized enterprises (SMEs); Financial markets

JEL Classification: D72, G12, E44, L25