Political Polarization and Finance (with Margarita Tsoutsoura)
Annual Review of Financial Economics, 2024, 16: 413-434.
Abstract: We review an empirical literature that studies how political polarization affects financial decisions. We first discuss the degree of partisan segregation in finance and corporate America, the mechanisms though which partisanship may influence financial decisions, and available data sources to infer individuals’ partisan leanings. We then describe and discuss the empirical evidence. Our review suggests an economically significant and often growing partisan gap in the financial decisions of households, corporate executives, and financial intermediaries. Partisan alignment between individuals explains team and financial relationship formation, with initial evidence suggesting that high levels of partisanship may be associated with economic costs. We conclude by proposing several promising directions for future research.
Coverage: HBS Working Knowledge
Fifty Shades of QE: Robust Evidence (with Brian Fabo, Martina Jancokova, and Lubos Pastor)
Journal of Banking & Finance, 2024, 159: 107065.
Abstract: Fabo, Jancokova, Kempf, and Pastor (2021) show that papers written by central bank researchers find quantitative easing (QE) to be more effective than papers written by academics. Weale and Wieladek (2022) show that a subset of these results lose statistical significance when OLS regressions are replaced by regressions that downweight outliers. We examine those outliers and find no reason to downweight them. Most of them represent estimates from influential central bank papers published in respectable academic journals. For example, among the five papers finding the largest peak effect of QE on output, all five are published in high-quality journals (Journal of Monetary Economics, Journal of Money, Credit and Banking, and Applied Economics Letters), and their average number of citations is well over 200. Moreover, we show that these papers have supported policy communication by the world's leading central banks and shaped the public perception of the effectiveness of QE. New evidence based on quantile regressions further supports the results in Fabo et al. (2021).
Coverage: SUERF Policy Brief
Political Ideology and International Capital Allocation (with Mancy Luo, Larissa Schäfer, and Margarita Tsoutsoura)
Journal of Financial Economics, 2023, 148(2): 150-173.
Jensen Prize for the 2023 Best Papers in the Areas of Corporate Finance and Organizations, Second Place
Abstract: Does investors' political ideology shape international capital allocation? We provide evidence from two settings---syndicated corporate loans and equity mutual funds---to show ideological alignment with foreign governments affects the cross-border capital allocation by U.S. institutional investors. Ideological alignment on both economic and social issues plays a role. Our empirical strategy ensures direct economic effects of foreign elections or government ties between countries are not driving the result. Ideological distance between countries also explains variation in bilateral investment. Combined, our findings imply ideological alignment is an important, omitted factor in models of international capital allocation.
Internet Appendix, Replication Package
Coverage: The Economist, BFI Research Brief, Chicago Booth Review, ProMarket
Attracting the Sharks: Corporate Innovation and Securities Class Action Lawsuits (with Oliver Spalt)
Management Science, 2023, 69(3): 1323-1934
Abstract: This paper provides novel evidence suggesting that securities class action lawsuits, a central pillar of the U.S. litigation and corporate governance system, can constitute an obstacle to valuable corporate innovation. We first establish that valuable innovation output makes firms particularly vulnerable to costly low-quality class action litigation. Exploiting judge turnover in federal courts, we then show that changes in class action litigation risk affect the value and number of patents filed, suggesting firms take into account that risk in their innovation decisions. A new perspective we provide is that innovation success, not only innovation failure, can increase firms' securities class action litigation risk.
Coverage: Columbia Law School's Blue Sky Blog, Chicago Booth Review
Partisan Professionals: Evidence from Credit Rating Analysts (with Margarita Tsoutsoura)
Journal of Finance, 2021, 76(6): 2805-2856
Financial Research Association (FRA) Best Paper Award 2018
Abstract: Partisan perception affects the actions of professionals in the financial sector. Using a novel dataset linking credit rating analysts to party affiliations from voter records, we show that analysts who are not affiliated with the U.S. president’s party downward-adjust corporate credit ratings more frequently. By comparing analysts with different party affiliations covering the same firm in the same quarter, we ensure that differences in firm fundamentals cannot explain the results. We also find a sharp divergence in the rating actions of Democratic and Republican analysts around the 2016 presidential election. Our results show analysts’ partisan perception affects firms’ cost of capital and investment policies.
Coverage: Wall Street Journal, Bloomberg, Bloomberg Opinion, CNBC, CNBC Squawk Box, The Economist, VOX, Crain's Chicago Business, CBR Comic, Irish Times, Barron's, MarketWatch
Fifty Shades of QE: Comparing Findings of Central Bankers and Academics (with Brian Fabo, Martina Jancokova, and Lubos Pastor
Journal of Monetary Economics, 2021, 120: 1-20. Lead Article.
Abstract: We compare the findings of central bank researchers and academic economists regarding the macroeconomic effects of quantitative easing (QE). We find that central bank papers find QE to be more effective than academic papers do. Central bank papers report larger effects of QE on output and inflation. They also report QE effects on output that are more significant, both statistically and economically, and they use more positive language in the abstract. Central bank researchers who report larger QE effects on output experience more favorable career outcomes. A survey of central banks reveals substantial involvement of bank management in research production.
Coverage: Wall Street Journal, Bloomberg, Bloomberg Opinion, Bloomberg Opinion, Fazit - das Wirtschaftsblog, Finansavisen, VOX, ProMarket, BFI Research Brief, Brookings, Central Banking, The Chicago Maroon, Chicago Booth Review
The Job Rating Game: Revolving Doors and Analyst Incentives
Journal of Financial Economics, 2020, 135(1): 41-67
AQR Top Finance Graduate Award 2016
WFA Cubist Systematic Strategies PhD Candidate Award for Outstanding Research 2016
Young Scholars in Finance Consortium Best Ph.D. Student Paper Award 2016
Abstract: Investment banks frequently hire analysts from rating agencies. While many argue that this "revolving door" creates captured analysts, it can also create incentives to improve accuracy. To study this issue, I construct an original dataset, linking analysts to their career paths and the securitized finance ratings they issue. First, I document that accurate analysts are more frequently hired by underwriting investment banks. Second, I exploit two distinct sources of variation in the likelihood of being hired by a bank. Both indicate that, as this likelihood rises, analyst accuracy improves. The findings suggest policymakers should consider incentive effects alongside capture concerns.
Coverage: ProMarket, Chicago Booth Review, Harvard Law School Forum on Corporate Governance and Financial Regulation
Distracted Shareholders and Corporate Actions (with Alberto Manconi and Oliver Spalt)
Review of Financial Studies, 2017, 30(5): 1660-1695
Abstract: Investor attention matters for corporate actions. Our new identification approach constructs firm-level shareholder "distraction" measures, by exploiting exogenous shocks to unrelated parts of institutional shareholders' portfolios. Firms with "distracted" shareholders are more likely to announce diversifying, value-destroying, acquisitions. They are also more likely to grant opportunistically-timed CEO stock options, more likely to cut dividends, and less likely to fire their CEO for bad performance. Firms with distracted shareholders have abnormally low stock returns. Combined, these patterns are consistent with a model in which the unrelated shock shifts investor attention, leading to a temporary loosening of monitoring constraints.
Coverage: Bloomberg Opinion, Harvard Law School Forum on Corporate Governance and Financial Regulation, Chicago Booth Review
The Political Polarization of Corporate America (with Vyacheslav Fos and Margarita Tsoutsoura)
Revise & Resubmit, Journal of Finance
Abstract: U.S. executives are increasingly segregating by political party. We establish this new fact using political affiliations from voter registration records for top executives of S&P 1500 firms between 2008 and 2022. We identify key drivers of this trend, including growing segregation among executives within geographies and industries. Executives whose political views differ from the majority of their team are more likely to depart, contributing to the increasing polarization. Furthermore, an analysis of insider trading behavior suggests that intensifying partisan disagreement among executives may further fuel this segregation. Across all of these findings, we observe a significant shift in the dynamics around the 2016 U.S. presidential election, which marks an inflection point in the political polarization of corporate leadership.
Coverage: NBER Digest, Wall Street Journal, The Economist, Washington Post, Washington Post Opinion, New York Times, Bloomberg, Los Angeles Times, MarketWatch, Marketplace, Forbes, Financial Times, Oxford Business Law Blog, BFI Research Brief, ProMarket, Corriere della Sera, Aftenposten, Wirtschaftswoche, Harvard Gazette, HBS Working Knowledge
On the program of NBER Corporate Finance Spring Meeting 2024, EFA 2024, Challenges in American Institutions Conference 2023 (Hoover), CEPR/Study Center Gerzensee European Summer Symposium in Financial Markets 2023, Berkeley Conference on Political Economy and Governance 2023, AFA 2022, USC Social and Behavioral Finance Conference 2022, Miami Behavioral Finance Conference 2022, London POLFIN workshop 2021
Corporate Actions as Moral Issues (with Oliver Spalt and Zwetelina Iliewa)
Abstract: We study how a representative sample of the U.S. population evaluates a broad range of corporate actions from a nonpecuniary perspective. Our core findings, based on large-scale online surveys, are that (i) self-reported nonpecuniary concerns are large, both for stock market investors and non-investors; (ii) concerns about the treatment of workers and CEO pay rank highest, higher than concerns about workforce diversity and fossil energy usage; (iii) moral universalism (Enke (2024)) emerges as a key driver of nonpecuniary preferences, explaining substantial variation both across participants as well as across corporate actions. Combined, our findings provide new evidence on the importance of moral concerns as a driver of nonpecuniary preferences in the context of corporate actions.
Coverage: ECGI Blog, ProMarket
On the program of WFA 2024, FIRS 2024, Global Corporate Governance Colloquium 2024 (Columbia Law), Stigler Center-CEPR Political Economy of Finance Conference 2024: Corporate Democracy, AFA 2025
The Political Economy of Firm Networks: CEO Ideology and Global Trade (with Mancy Luo and Margarita Tsoutsoura)
Abstract: We examine how the political ideology of corporate leaders shapes cross-border firm networks. Exploiting changes in ideological alignment between U.S. firm CEOs and foreign governments around close foreign elections, we show that U.S. firms are more likely to terminate trade relationships with countries led by governments whose ideology becomes more distant from that of their CEOs. The impact is concentrated among CEOs holding strong political views, and is particularly pronounced for shorter trade relationships, suggesting ideological alignment is more relevant in more flexible and substitutable connections. Our findings highlight the role of ideology in shaping the formation and persistence of international firm networks.
On the program of 3rd London Political Finance (POLFIN) Workshop 2025
Partisan Corporate Speech (with William Cassidy)
Abstract: We develop a novel measure of partisan corporate speech using techniques from natural language processing. Using all tweets sent by companies in the S&P 500, we document a large increase in the amount of partisan corporate speech between 2011 and 2022. From 2019 onwards, this increase is disproportionately driven by companies using more Democratic-sounding speech. Additional tests suggest the recent growth in sustainable investing may have contributed to the surge in Democratic speech. Stock returns are close to zero around the average partisan tweet, but exhibit substantial heterogeneity by degree of stakeholder alignment.
Coverage: The Economist
On the program of NBER SI Big Data and High-Performance Computing for Financial Economics 2024, EFA 2024, Young Scholars Finance Consortium 2025
Learning by Doing: The Value of Experience and the Origins of Skill for Mutual Fund Managers (with Alberto Manconi and Oliver Spalt)
Abstract: Learning by doing matters for professional investors. We develop a new methodology to show that mutual fund managers outperform in industries where they have obtained experience on the job. The key to our identification strategy is that we look "inside" funds and exploit heterogeneity in experience for the same manager at a given point in time across industries. As fund managers become more experienced, they pick better stocks, and their trades become better predictors for abnormal stock returns around subsequent earnings announcements. Our approach identifies experience as a first-order driver of observed mutual fund manager skill.
On the program of WFA 2015, EFA 2014, CEPR Gerzensee 2014, FIRS 2014, FRA 2013