Government Spending, Political Cycles and the Cross Section of Stock Returns

Belo, Frederico; Gala, Vito; Li, Jun

doi:10.2139/ssrn.1572801

Cited by 101 publications

(128 citation statements)

References 43 publications

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“…To ensure that our measure of political uncertainty does not merely capture changes in the business cycle, we follow Petkova and Zhang (2005) and Belo et al (2013), and control for seven business cycle related variables, namely inflation rate, unemployment, industrial production, default spread, term spread and short-term risk free rate and a recession dummy. The inflation rate is the monthly growth rate of the Consumer Price Index for All Urban Consumers.…”

Section: Business Cycle Variablesmentioning

confidence: 99%

The effect of political uncertainty on the cost of corporate debt

Waisman

Zhu

2015

Journal of Financial Stability

196

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Section: Business Cycle Variablesmentioning

confidence: 99%

The effect of political uncertainty on the cost of corporate debt

Waisman

Zhu

2015

Journal of Financial Stability

196

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“…By comparing the stock returns of firms in industries with different exposure to government spending, Belo et al . () investigate the impact of the presidential partisan cycle on stock returns through the channel of government spending. They find that in the United States, firms exposed more to government spending experience higher (lower) stock returns during Democratic (Republican) presidencies.…”

Section: Political Uncertainty and Asset Pricesmentioning

confidence: 99%

Political Uncertainty and Finance: A Survey

Dai

Zhang

2019

Asia-Pac J of Fin Stud

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An emerging stream of literature investigates the impact of political uncertainty on financial markets. In this survey, we review this line of literature from four perspectives, namely, asset prices, corporate policies, financial intermediaries, and economy and households, suggesting that political uncertainty generally increases market friction and as a result changes corporate behavior and adversely affects the economy. At the end of the survey, we discuss a few future directions worth being explored in view of the relationship between political uncertainty and finance. most likely to occur if the old policy has led to unexpected low realized profitability. Therefore, policy change can increase firms' expected profitability, thereby pushing stock prices up, that is, the cash flow effect. However, due to the new policy's higher uncertainty, policy change can also increase discount rates, thereby pushing stock prices down, that is, the discount rate effect. The authors show analytically that, on average, the discount rate effect will outweigh the cash flow effect and stock prices will fall at the announcement of a government policy change. The reason is that positive announcement returns tend to be small as policy changes that have the potential to push stock prices up are mostly expected by investors. Moreover, as new policies introduce more uncertainty and raise the volatility of the stochastic discount factor, government policy changes will increase stock return volatilities and correlations.Closely related to P astor and Veronesi (2012, 2013) analyze the risk premium induced by political uncertainty. P astor and Veronesi (2013) extend the general equilibrium model developed by P astor and Veronesi (2012) in two key aspects. First, unlike P astor and Veronesi (2012) who assume political cost is unknown to investors, P astor and Veronesi (2013) allow investors to learn about the political costs of the new policies through the stream of political news. Second, P astor and Veronesi (2012) assume that all government policies are identical a priori, whereas P astor and Veronesi (2013) allow the government to choose from a set of heterogeneous policies. The impacts of both, the learning about political costs and policy heterogeneity, are larger in weak economic conditions when a policy change is more likely to happen.Accordingly, in P astor and Veronesi's (2013) analytic model, stock returns are driven by capital shocks, impact shocks, and political shocks, and correspondingly the equity risk premium can be decomposed into three components based on the three types of shocks. As the optimal choice for the government is to change its policy when the old policy is perceived as sufficiently unfavorable, the authors show analytically that the composition of the risk premium varies depending on the economic state. In weak economic conditions when the probability of a policy change is high, the equity risk premium is largely driven by the political risk premium. However, in strong economic conditions when a policy change ...

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“…The uncertainty about the effects of public spending also remains in the context of the capital market, especially in the behavior of financial assets given alterations in fiscal policy guidelines. Despite the issue still being barely explored in the academic literature (Afonso & Sousa, 2011;Belo, Gala & Li, 2013), some studies have already been elaborated that seek to relate government spending policies with stock returns. Table 1 presents some of these examples.…”

Section: Public Spending and Capital Marketmentioning

confidence: 99%

“…Public spending has a negative effect on stock prices, while tax exemptions, which have a smaller impact on spending, produce positive effects on stock returns. Belo et al (2013) To verify the variation in stock returns caused by alterations in public spending due to the alternation between Republican and Democratic governments.…”

Section: Public Spending and Capital Marketmentioning

confidence: 99%

Analysis of the impact of Fies on the stock returns from the higher education sector

Pinheiro

Serrano

2019

Rev. contab. finanç.

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This article aims to analyze if the issuance of Series E Treasury Bonds (CFT-Es) generates abnormal returns in a higher education stock portfolio and verify if the Brazilian higher education market is efficient in its semi-strong form. The main purpose of CFT-Es is to transfer funds to institutions with the aim of providing finance to students enrolled in private universities. These issuances have effects on the capital market, considering that after the program began, the first initial public offering (IPO) of a Brazilian university occurred. Moreover, according to the National Institute for Educational Studies and Research Anísio Teixeira/Ministry of Education and Culture (Inep/MEC), Brazil has the largest market for higher education in Latin America. Several studies have been conducted to analyze the relationship between monetary policy and financial markets, but this has not occurred within the scope of fiscal policy. Such research is appropriate, considering the discussion on the need to contain government spending, but at the same time stimulate the Brazilian economy. The main contribution of the study is it indicates that the higher education market has tended towards the efficiency hypothesis, considering that in the first analysis, H0 was not rejected for 82% of the windows of events, and in the second analysis, H0 was not rejected for any of the windows of events, with there being no evidence of abnormal gains due to funds being released for the Student Finance Fund (Fies). The event study methodology was used to test the hypotheses of abnormal returns obtained due to CFT-Es being issued through the release of ordinances. A portfolio composed of higher education stocks was elaborated, weighted by the quarterly amount receivable from Fies for each institution, and covering 2009 to 2017. The results show that the stocks of institutions benefiting from Fies tend to react efficiently to CFT-E issuances authorized by the National Treasury.

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Government Spending, Political Cycles and the Cross Section of Stock Returns

Cited by 101 publications

References 43 publications

The effect of political uncertainty on the cost of corporate debt

The effect of political uncertainty on the cost of corporate debt

Political Uncertainty and Finance: A Survey

Analysis of the impact of Fies on the stock returns from the higher education sector

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