Lame Duck Presidency and Stock Returns

Abstract

Recent studies highlight positive effect of political connections on firm performance and stock returns. This paper shows that the positive effect of political connections on the cross-sectional stock returns disappears in the lame duck presidency period, defined as the last two years before the Presidential party change. Additional tests suggest that the diminishing political effect in the lame duck period is more pronounced during the Republican presidency and the last two years of the first term presidency. The results are driven by the firms located in the states where residents more strongly support the president, by small firms, who typically do not have financial resources to hedge away political risks, and by firms in the consumer goods, sales, and manufacturing industries.