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Journal Article

From Washington to Wall Street: The Relationship Between National Politics and Stock Market Performance

01 Dec 2013-THE JOURNAL OF APPLIED BUSINESS AND ECONOMICS-Vol. 15, Iss: 3, pp 68-90

AbstractThe question explored in this paper is the relationship between national politics and the stock market. There is an interesting relationship between Washington and Wall Street that has existed in the United States for decades that many citizens either do not know or do not understand. Government has had an increasingly influential role in the economy of the United States, particularly since the creation of the Federal Reserve. We seek to understand and explain the impact the balance of power in Washington and political activity can have on the performance of the stock market.

Topics: Stock market (60%), Politics (53%), Government (51%), Balance (accounting) (50%)

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Citations
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Journal ArticleDOI
Abstract: Purpose The purpose of this paper is to investigate the potential impact of political party control on bank profitability and risk. This study extends previous work by looking at overall political power with respect to party control of the House, Senate, and the Presidency. Design/methodology/approach This paper employs regression analysis using several different dependent measures of risk and return. The independent variables include dummies to represent political power and control. Findings The results indicate that political control does impact both bank returns and risk. More specifically, concentration of power in either party results in higher profits. However, risk and returns typically increase during periods of democratic control. Originality/value To date, no research addresses the impact of political control and party affiliation on bank risk and return. Given the importance of banks to the overall economy and financial system, this research should provide policymakers and regulators with a different perspective on bank risk and return.

1 citations


References
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Book
01 Jan 1962
Abstract: In the classic bestseller, Capitalism and Freedom, Milton Friedman presents his view of the proper role of competitive capitalism--the organization of economic activity through private enterprise operating in a free market--as both a device for achieving economic freedom and a necessary condition for political freedom. Beginning with a discussion of principles of a liberal society, Friedman applies them to such constantly pressing problems as monetary policy, discrimination, education, income distribution, welfare, and poverty. "Milton Friedman is one of the nation's outstanding economists, distinguished for remarkable analytical powers and technical virtuosity. He is unfailingly enlightening, independent, courageous, penetrating, and above all, stimulating."-Henry Hazlitt, Newsweek "It is a rare professor who greatly alters the thinking of his professional colleagues. It's an even rarer one who helps transform the world. Friedman has done both."-Stephen Chapman, Chicago Tribune

7,019 citations


Posted Content
Abstract: The excess return in the stock market is higher under Democratic than Republican presidencies: 9 percent for the value-weighted and 16 percent for the equal-weighted portfolio. The difference comes from higher real stock returns and lower real interest rates, is statistically significant, and is robust in subsamples. The difference in returns is not explained by business-cycle variables related to expected returns, and is not concentrated around election dates. There is no difference in the riskiness of the stock market across presidencies that could justify a risk premium. The difference in returns through the political cycle is therefore a puzzle.

426 citations


Book
20 Oct 2009

426 citations


"From Washington to Wall Street: The..." refers background in this paper

  • ...In 2008, the U.S. government went to great monetary measures in an effort to keep the economy from plunging into a depression (Paulson, 2010; Sorkin, 2010; Morgenson and Rosner, 2011)....

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  • ...government went to great monetary measures in an effort to keep the economy from plunging into a depression (Paulson, 2010; Sorkin, 2010; Morgenson and Rosner, 2011)....

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Journal ArticleDOI
Abstract: The excess return in the stock market is higher under Democratic than Republican presidencies: 9 percent for the value-weighted and 16 percent for the equal-weighted portfolio. The diierence comes from higher real stock returns and lower real interest rates, is statistically signi¢cant, and is robust in subsamples. The diierence in returns is not explained by business-cycle variables related to expected returns, and is not concentrated around election dates. There is no diierence in the riskiness of the stock market across presidencies that could justify a risk premium. The diierence in returns through the political cycle is therefore a puzzle. IN THE RUN-UP TOALL PRESIDENTIAL ELECTIONS, the popular press is awash with reports about whether Republicans or Democrats are better for the stock market. Unfortunately, the popular interest has not been matched by academic research. This paper ¢lls that gap by conducting a careful empirical analysis of the relation between presidential elections and the stock market. Using data since 1927, we ¢nd that the average excess return of the valueweighted CRSP index over the three-month Treasury bill rate has been about 2 percent under Republican and 11 percent under Democratic presidentsFa striking diierence of 9 percent per year! This diierence is economically and statistically signi¢cant. A decomposition of excess returns reveals that the diierence is due to real market returns being higher under Democrats by more than 5 percent, as well as to real interest rates being almost 4 percent lower under Democrats. The results are even more impressive for the equal-weighted portfolio, where the diierence in excess returns between Republicans and Democrats reaches 16 percent. Moreover, we observe an absolute monotonicity in the diierence between size-decile portfolios under the two political regimes: From 7 percent for the largest ¢rms to about 22 percent for the smallest ¢rms.

312 citations


Journal ArticleDOI
Abstract: We examine the relationship between equity incentives and earnings management in the banking industry. By focusing on this regulated industry and using industry-specific earnings management proxies, we provide evidence on the impact of regulation on earnings management arising from CEOs' equity incentives. We find that bank managers with high equity incentives are more likely to manage earnings, but only when capital ratios are closer to the minimum regulatory capital requirements. This finding indicates that in the banking industry, potential regulatory intervention induces, rather than mitigates, earnings management arising from equity incentives.

290 citations


"From Washington to Wall Street: The..." refers background in this paper

  • ...Research has shown that increased cash flows lead to higher earnings for companies, and these higher earnings are then reflected in the increases of company stock prices (Johnson and Zhao, 2012; Cheng, Warfield, and Ye, 2011; Bali, Demirtas, and Tehranian, 2008)....

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