Graduation Year

2023

Document Type

Dissertation

Degree

Ph.D.

Degree Name

Doctor of Philosophy (Ph.D.)

Degree Granting Department

Finance

Major Professor

Christos Pantzalis, Ph.D.

Co-Major Professor

Jung Chul Park, Ph.D.

Committee Member

Daniel Bradley, Ph.D.

Committee Member

Ninon Sutton, Ph.D.

Committee Member

Jong Chool Park, Ph.D.

Keywords

Asset-pricing, PAC, Lobby, Contract, Regulation

Abstract

The political profiles of an industry influence its performance due to its impact on industry-level investor sentiment and idiosyncratic risk. I form eight comprehensive political profile portfolios after double sorting on industry-level: (1) political geography proxied by political alignment, (2) corporate political strategies (CPS), proxied by donations to political action committees & lobbying expenditures, (3) and government interference, proxied by dependence on procurement contracts & federal regulations, and exhibit that an industries’ political profiles impact its returns. Industries with high political alignment, concentrated corporate political strategies, and low government interference, deemed the high-performance portfolio, earn an annualized alpha of 10.3428%, significantly out-performing the market. The results hold in a cross-sectional setting, as industries in the high-performance portfolio, earn a 10.338% higher return than the base group. Mispricing is reduced in the short-term in the high-performance portfolio, but prices revert in the medium and long-term. Industries in the high-performance portfolio are more likely to experience positive earnings surprises, and investors tend to under-react to the bad news of firms in the high-performance portfolio. In addition, investor sentiment and idiosyncratic risk is substantially higher for those industries. The political profile impact on stock returns is distinct and substantially stronger than other political factors known to predict returns.

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