STOCK PRICES CAPITALIZE POLITICAL PLATFORMS
August 26, 2004
The stock market capitalizes the platforms of presidential competitors through fluctuations in the prices of companies expected to fare better under one or the other party's platforms. Brown University economist Brian G. Knight recently examined the 2000 presidential race using financial analysts' reports that identified companies likely to do well under an administration headed by George W. Bush or one headed by Al Gore.
Analysts expected that pharmaceuticals, defense, traditional energy and tobacco would do better under Bush. Alternative energy and Microsoft competitors were expected to do better under Gore. There were 41 companies on the Bush list and 29 on the Gore list, representing about $3 trillion in stock market value, or about a fifth of the total value in the Wilshire 5000.
Knight calculated the daily excess returns of each stock -- the actual return adjusted for the overall movements of the market on a given day. As a proxy for the fluctuating probability of winning, Knight used data from the Iowa Electronic Markets (www.biz.uiowa.edu/iem), where participants could trade a security that paid off only if Bush one. Fluctuations in its price thus represented to the sum of judgments about the probability that Bush or Kerry would win.
According to Knight's estimates:
- Gore-favored companies were worth 6 percent less in a Bush administration, while Bush-favored companies were worth 3 percent more, adding up to a 9 percent difference.
- Bush's victory over Gore transferred over $100 billion in market capitalization from the 29 Gore-favored firms to the 41 Bush-favored firms.
- For example, alternative energy companies were worth 16 percent less under Bush, while tobacco companies were worth 13 percent more.
Knight also found that the companies that were expected to do well under Bush contributed more, proportionally, to the Republican Party than to the Democratic Party.
Source: Hal R. Varian, "Donations Can Buy You Profits," Economic Scene, New York Times, August 26, 2004; based on Brian Knight, "Are Policy Platforms Capitalized into Equity Prices? Evidence from the Bush/Gore 2000 Presidential Election," Working Paper w10333, National Bureau of Economic Research, March 2004.
For NBER abstract http://www.nber.org/papers/w10333
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