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

Frederico Belo, Vito D. Gala, Jun Li

Research output: Contribution to journalArticlepeer-review

91 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)305-324
Number of pages20
JournalJournal of Financial Economics
Volume107
Issue number2
DOIs
StatePublished - Feb 2013

Keywords

  • Asset pricing
  • D57
  • E62
  • G12
  • G18
  • Government spending
  • Input-output analysis
  • Political cycles

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