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Corporate taxes, partisan politics, and stock returns

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  • Mella, Javier

Abstract

This paper studies the effect of partisan politics on stock returns in the U.S. by exploring different measures of corporate taxes. The results support the partisan politics cycle effect on equity returns. The cross-sectional analysis shows that the measures of corporate taxes impact stock returns but only when interacting with partisanship. Moreover, the time-series analysis shows that an investment strategy based on these results provides abnormal returns and that investors only partially anticipate them. The findings are consistent with a cash-flow-based explanation, in contrast with a risk-based explanation, and highlight the relevance of the political orientation of the governments in explaining the variation of stock returns.

Suggested Citation

  • Mella, Javier, 2024. "Corporate taxes, partisan politics, and stock returns," The North American Journal of Economics and Finance, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:ecofin:v:72:y:2024:i:c:s1062940824000445
    DOI: 10.1016/j.najef.2024.102119
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    More about this item

    Keywords

    Asset pricing; Political cycles; Corporate taxes; Stock market; Partisan politics;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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