Finance Seminar（2019-06)

Topic: Political Ties and Predictable Returns

Speaker: Siyi Shen, Boston College

Time: Thursday, 17 January, 13:00-14:30

Location: Room K01, Guanghua Building 2

Abstract:

This paper demonstrates the importance of inter-firm political links, measured by common campaign contributions made by firm executives. Price movements of a firm’s stock are predictable based on stock price movements of connected firms. Cross-predictability is strongest among politically connected firms that operate in different states and sectors, suggesting that inter-firm political links are largely overlooked due to limited investor attention. To probe the underlying mechanism, I present evidence suggesting that common sources of political exposure across firms ex-ante cannot alone explain this relationship; instead, political ties play the key role, further synchronizing ex-post political agendas. Using the 2010 Citizens United v. FEC decision as an exogenous shock, I find that cross-predictability is weaker for firms that are restricted from actively engaging in political campaigns. Long-short stock portfolios based on political ties yield risk-adjusted returns of 4%-5% per annum.

Introduction:

Siyi Shen is a Ph.D. candidate in Finance at Boston College. He holds a B.A. in Finance from Zhejiang University of Technology, and a M.S. in Quantitative Finance from Fordham University. His main research interests are empirical asset pricing, investment, political economy, and behavioral finance.

//sites.google.com/bc.edu/siyishen

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