Red vs. Blue Stocks: Politics and Profitability of Firms

Yuxing Yan

This paper shows the impact of politics on a firm’s profitability. The Republican Party has a color of red, while the Democratic Party is coded blue. In this paper, we show that the equity market’s performance is statistically the same whoever occupies the White House. However, at the firm level we see a quite different picture. Over the years, 4.35 percent of firms could be labeled as blue meaning their stocks perform better when the sitting president comes from the Democratic Party. The red firms count for 5.11 percent. The rest, 90.54 percent of all US firms, are colorless. In an election year, the excess volatility of colored stocks increases dramatically, 48 percent more volatile than colorless ones. In addition, a zero-investment portfolio formed by longing and shorting opposite colored stocks at the beginning of a new administration generates an abnormal return of 9.3 percent per year.

JEL Codes: G10, G11, G18, G28

DOI : http://dx.doi.org/10.21102/jbpr.2015.07.101.06