The Jeffords Effect

UCLA Economics Working Paper

33 Pages Posted: 8 Jan 2005

See all articles by Seema Jayachandran

Seema Jayachandran

Northwestern University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: November 2004

Abstract

In May 2001, Senator Jim Jeffords left the Republican Party and tipped control of the U.S. Senate to the Democrats. This paper uses the surprise event to demonstrate what I term the Jeffords effect: changes in the political landscape have large effects on the market value of firms. I use a firm's soft money donations to the national parties as the measure of how the firm aligns itself politically. In this event, study of large public firms, a firm lost 0.8% of market capitalization the week of Jeffords' switch for every $250,000 it gave to the Republicans in the previous election cycle. Based on the point estimates, the stock price gain associated with Democratic donations is smaller than the loss associated with Republican donations, but the estimates are consistent with the coefficients being equal and opposite. The results withstand several robustness checks, and the effects appear to persist long after the event. The relationship between soft money and stock returns may or may not be causal: Soft money could be a proxy for how well each party's policies suit a firm, or donations might affect how much help politicians give to a firm.

Keywords: Campaign contributions, political parties, event study, political influence

Suggested Citation

Jayachandran, Seema, The Jeffords Effect (November 2004). UCLA Economics Working Paper, Available at SSRN: https://ssrn.com/abstract=644321 or http://dx.doi.org/10.2139/ssrn.644321

Seema Jayachandran (Contact Author)

Northwestern University - Department of Economics ( email )

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