Government spending, political cycles, and the cross section of stock returns

Frederico Belo, Vito D. Gala and Jun Li

Journal of Financial Economics, 2013, vol. 107, issue 2, 305-324

Abstract: Using a novel measure of industry exposure to government spending, we show predictable variation in cash flows and stock returns over political cycles. During Democratic presidencies, firms with high government exposure experience higher cash flows and stock returns, while the opposite pattern holds true during Republican presidencies. Business cycles, firm characteristics, and standard risk factors do not account for the pattern in returns across presidencies. An investment strategy that exploits the presidential cycle predictability generates abnormal returns as large as 6.9% per annum. Our results suggest market underreaction to predictable variation in the effect of government spending policies.

Keywords: Asset pricing; Government spending; Political cycles; Input–output analysis (search for similar items in EconPapers)
JEL-codes: D57 E62 G12 G18 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (142)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:107:y:2013:i:2:p:305-324

DOI: 10.1016/j.jfineco.2012.08.016

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