Market's Political Preferences: An Analysis of Market Returns and Realized Volatility During Presidential Elections

Markets and politics are intimately linked. Moreover, the extensive lobbying practices in the US evidence the interest of firms in political outcomes. Some companies go as far as to donate to political campaigns. On the short-term,these donations can signal political leanings and a company's preference for a particular party to be in power. Hence, it is worth asking whether a firm's political leaning is a determining factor in their stocks performance, and whether the market prefers a particular leaning over another, especially around the most important electoral event in the US: presidential elections. In this paper, we set out to examine market preferences over companies' political leanings in the immediate dates after a presidential election takes place. Our hypothesis is that, under normal economic circumstances, markets favor companies who lean toward republican candidates, but under economic stress periods such as recessions, the market is less favorable toward such companies. I look at daily stock prices for a sample of public companies associated with PACs to determine if their stock returns are affected by the companies' political leaning. I find that election outcomes affect stock returns, but there effects are usually the same regardless of political leaning. The signs of the effects over the post-event window, leading us to conduct a second study to evaluate the volatility of the stocks' returns. We find democrat-leaning and neutral stocks have higher frequency of significant changes in volatility, while republican stocks are relatively stable, suggesting markets prefer companies that lead republican. The only exception is the 2008 election, where changes in volatility are significant for all stocks regardless of political leaning, indicating shifting preferences probably caused by the recession environment.