Effects of Election Results on Stock Price Performance: Evidence from 1976 to 2008

Abstract

Election results may influence corporate performance by general changes in government spending and tax changes. In addition, specific companies or sectors might benefit or suffer from sector-specific governmental decisions. Stock market participants will incorporate expectations about political change into stock prices prior to an election and adjust their opinion according to the actual decision making following the election. To date, we do not know whether both the Republican and Democratic parties are associated with particular stock price effects for certain companies or sectors and whether these effects persist over several elections. We analyze abnormal stock price returns around the U.S. presidential elections from 1976 to 2008 with focus on party-specific favoritism. The results demonstrate statistically significant (positive or negative) cumulative abnormal price returns for most industries. Most effects appear to be related to the individual presidents and changes in political decision making per se irrespective of the underlying political ideology.

Keywords: partisanship, sector performance, political economics

JEL Classification: G11, G18, P16