Corporate taxes, partisan politics, and stock returns

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.