Presidential election campaign platforms impact the stock market

03/22/04

Campaign politics

PROVIDENCE, R.I. -- By the time George W. Bush secured victory over Al Gore in the 2000 U.S. presidential election, more than $100 billion in market capital had shifted from Gore-favored firms to Bush-favored firms, according to a new study by a Brown University economist. This is one of the first studies to document the effect of campaign politics on the economy during the race for the White House.

"Usually we think about the economy affecting elections in the sense that a weak economy turns voters away from an incumbent," said study author Brian G. Knight, assistant professor of economics and public policy at Brown and a faculty research fellow at the National Bureau of Economic Research. "But the reverse is also true: Elections have an impact on the economy."

Knight studied 70 politically sensitive firms with a focus on five key sectors of the economy: pharmaceuticals, defense, energy, technology (specifically Microsoft and its competitors), and tobacco. Forty-one of those firms were favored under the Bush platform, and 29 were favored by Gore. Knight's study is published in the March 2004 National Bureau of Economic Research working paper series, available online at www.nber.org/papers.

On a daily basis from May 1, 2000, to the eve of the election, Nov. 7, 2000, Knight charted the equity and stock prices of the politically sensitive firms. These firm-specific equity returns were related to opinion polls and the probability of a Bush victory as implied by prices of candidate future contracts traded on the Iowa Electronic Market. The 2000 election provided a strong research case because it was a close race between the two candidates, with each candidate leading in the polls at various points in the race, Knight said.

Equity prices in the five sectors swung with the polls. When Bush's prospects were falling, Bush-favored firms were under-performing, and Gore-favored firms were thriving. Likewise, Gore-favored companies fared poorly whenever Gore was behind in the polls, while Bush-favored firms performed well.

As a result of Bush's victory in the election, Bush-favored firms are worth 3 percent more, and Gore-favored firms 6 percent less, implying a statistically significant differential return of 9 percent, said Knight. The most sensitive sectors were tobacco, worth 13 percent more under the Bush administration; Microsoft competitors, worth 15 percent less under the Bush administration; and alternative energy companies, worth 16 percent less under the Bush administration.

These findings are surprising because the influence over the economy occurs at a point in time before the successful candidate will have the power to draft any legislation affecting the firms. "Policies may be reflected in equity prices during the electoral process, which occurs long before the legislative enactment of policies," said Knight.

The results of this paper predict similar impacts on the economy from the current race for the White House between President Bush and Sen. John Kerry, who are currently in a statistical dead heat. While the election is still months away, economists in at least one brokerage house have already begun identifying sectors of the economy likely to benefit or suffer under Kerry or Bush presidencies, according to a recent media report.

Source: Eurekalert & others

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