Partisan Return Gap
By Jinfei Sheng | Posted on 19 July 2021
Post type: Paper
We document sharp differences in stock price responses to COVID-19-related news between public firms headquartered in blue counties (dominated by Democratic voters) and those in red counties (dominated by Republican voters). Red-county stocks on average experience 20 basis points higher abnormal returns than blue-county stocks on days with important COVID-19 related news. We call this the Partisan Return Gap. While the return gap may appear to be related to lock down policies, COVID cases, and industry and firm fundamentals, we find these factors can only explain at most 15% of the return gap. The majority of the gap is likely due to behavioral biases triggered by partisan disagreement. Overall, this paper shows that investors’ political leanings are important attributes to politically polarized stock prices during the pandemic.
Co-Author(s): Zheng Sun and Wanyi Wang