The Jeffords Effect: How Political Changes Affect Market Values of Firms


Seema Jayachandran has done some interesting research to show that political changes can impact market values.

In May 2001, Senator James Jeffords left the Republican Party and tipped control of the U.S. Senate to the Democrats. This paper uses the surprise event to demonstrate what I term the "Jeffords effect": changes in the political landscape have large effects on the market value of firms. I use a firm's soft-money donations to the national parties as the measure of how the firm aligns itself politically. In this event study, a firm lost .8 percent of market capitalization the week of Jeffords's switch for every $250,000 it gave to the Republicans in the previous election cycle. On the basis of the point estimates, the stock price gain associated with Democratic donations is smaller than the loss associated with Republican donations, but the estimates are consistent with the effects being equal and opposite. The results withstand several robustness checks, and the effects appear to persist over time.

Interesting. A draft version of the full paper is available here. The Wall Street Journal had a related article on elections and economics several weeks ago.