Editorial introduction to the special issue on monetary conditions, political policy, and security returns

Citation

Beyer, S., Jensen, G. and Johnson, R. (2015), "Editorial introduction to the special issue on monetary conditions, political policy, and security returns", Managerial Finance, Vol. 41 No. 10. https://doi.org/10.1108/MF-08-2015-0214

Editorial introduction to the special issue on monetary conditions, political policy, and security returns

Article Type: Editorial From: Managerial Finance, Volume 41, Issue 10.

Introduction

Monetary and political policy are widely believed to impact the capital markets. However, surprisingly little research exists analyzing the nature or significance of these influences. In fact, these influences tend to be two of the most often ignored. As co-editors of this special issue we hope to illustrate the important role that monetary and political policy play for security returns.

The most heavily cited academic studies on monetary policy forward evidence suggesting systematic patterns in security returns are associated with changes in monetary policy. Specifically, stock returns in periods when the Fed is following an expansive policy are shown to be superior to returns during periods of restrictive Fed policy (e.g. Jensen et al., 1996, 1998; Patelis, 1997; Thorbecke, 1997; Bordo et al., 2008). Research analyzing the relation between political policy and capital markets typically focusses on party of the president. The first politically based papers reviewed the short-term reactions of the security markets to presidential elections (e.g. Niederhoffer, et al. 1970; Reilly and Drzycimski, 1976; Smirlock and Yawitz, 1985). More recent studies identify patterns in long-term security returns related to the party of the president (e.g. Johnson et al., 1999; Santa-Clara and Valkanov, 2003; Beyer et al., 2004; Sy and Zaman, 2011). Recent interest in monetary and political policy provided the germination for this focussed issue of Managerial Finance. Specifically, this special edition presents seven papers that relate financial market developments to monetary policy, political policy, or both monetary and political policy.

Accepted papers

The first paper, “Does the revolving door swing both ways? The value of political connections to US firms” (Houston and Ferris, 2015), studies the financial benefit of political connections. The paper finds evidence suggesting that hiring a former politician has long-term benefits for the returns of the hiring firm. However, the firm does not significantly benefit when a former manager enters politics. The paper reviews specific details about the industry of the hiring firm, office held by the former politician, as well as longevity of the position. The authors find that longevity in a cabinet position is important, while formal Congressional or Senate leadership positions are not. The paper also shows that the longer politicians are out of office the more value they provide to the hiring firm. The paper concludes the revolving door does swing both ways, but the value associated with a politician hired by a firm is effectively permanent than the former corporate employee working in politics. In the end political connections seem to matter, but the connections are not all equivalent.

The second paper, “What to expect when you’re electing” (Beyer et al., 2015), analyzes the impact of political and monetary policy on equity returns. This paper looks at the effects of party of the president, monetary policy – expansive vs restrictive, state of political gridlock – Congress and the President are of the same party vs different parties, and the year of the Presidential term. The paper reviews these effects both uniquely and jointly for every presidential term from 1965 to 2008. The authors find weak evidence supporting prior work that Democratic presidencies are associated with higher equity returns. The authors find a statistically significant, positive, and size-dependent relationship exists between expansive monetary policy and equity-market returns. Moreover, the authors find evidence supporting the notion that political harmony (not political gridlock) is good for the equity markets. Last, the authors find that the third year of a president’s term is associated with statistically significantly larger equity returns. Note, monetary policy, political gridlock, and year of the presidential term are all significant when these effects are jointly analyzed. However, party of the president is no longer significant in the joint factor analysis.

The third paper, “Stock returns and the US dollar: the importance of monetary policy” (Hughen and Beyer, 2015), assesses the relationship between equity returns and the relative value of the US dollar. In this paper the authors examine stock returns from 1973 to 2013. The authors determine that returns in the equity markets are 2.5 times greater when the dollar is trending up. Moreover, the authors find evidence showing that these returns are notably higher during expansive (or loose) monetary policy periods. In fact, the authors note that the equity returns during a period of an upward trending dollar are twice as large when monetary policy is expansive.

The fourth paper, “Presidential parties, monetary regimes, and health care returns” (Bredthauer et al., 2015), studies the stock return performance of the US health care industry, in the context of political party and monetary policy. This paper finds different return behavior for Democratic presidencies and Republican presidencies, depending on the monetary policy stance (expansive or restrictive) of the Federal Reserve. The authors note that health care has earned a significantly positive risk-adjusted return over the past 60 years. This paper’s findings suggest a systematic relationship that may be exploited. Hence an opportunity for management and shareholders of this heavily regulated industry.

The fifth paper, “Firm size and the political cycle premium” (Malone et al., 2015), studies left-wing and right-wing political cycles that exist in the New Zealand markets. The New Zealand market presents some particularly useful features for such a study. For instance, the party in control has considerable power in New Zealand and it has been linked with a right-wing premium by prior research (as opposed to a left-wing premium). The results support prior work that a political party premium may exist. However, the authors find that the New Zealand market exhibits a right-wing party premium as opposed to a left-wing premium (as in the US markets). The authors discuss the possibility that the three-year New Zealand political term may lead to greater volatility in equity returns.

The sixth paper, “What do European stock markets prefer? Left or right governments?” (Stoian and Tatu-Cornea, 2015), reviews political influences in the European markets. The authors find evidence of a right-wing market premium. However, this result is only robust for the “advanced” European economies. These results run contrary to the US-based studies, most of which find a left-wing market premium. Hence the implication of these results is not certain. The authors do note that right-wing policies in Europe also incorporate an important social component.

The seventh paper, “Tunisian revolution and stock market volatility: evidence from FIEGARCH model” (Jeribi et al., 2015), reviews the effects of political uncertainty on stock market risk. The authors note a structural shift in risk for certain industries following the Tunisian revolution. A major contribution of this paper is the illustration of how political uncertainty greatly contributes to financial volatility. This paper could prove particularly helpful to political policymakers wishing to stimulate the economy following a crisis. Additionally, using this paper’s results portfolio managers could assess which industries have had a permanent risk shift and which have had a temporary risk shift.

Conclusions

In conclusion, we would like to express our gratitude to all authors that submitted papers to this important Special Issue. As the markets continue to develop and grow we believe the role of monetary and political policy will become increasingly important as an academic topic. We would also like to thank all those who took the time to provide referee service to this issue of Managerial Finance. Please note, papers received after the deadline of this Special Issue in monetary and political policy can be resubmitted to another Managerial Finance issue. Additionally, we are deeply indebted to all of the staff at Managerial Finance who supported our efforts as Guest Editors. Lastly, and notably, we issue a special thanks to Don Johnson, Managerial Finance’s Head Editor for his prompt help and expert guidance.

Dr Scott Beyer - College of Business, University of Wisconsin Oshkosh, Oshkosh, Wisconsin, USA

Dr Gerry Jensen - Heider College of Business, Creighton University, Omaha, Nebraska, USA

Dr Robert Johnson - The American College, Bryn Mawr, Pennsylvania, USA

References

Beyer, S., Garcia-Feijoo, L., Jensen, G. and Johnson, R.R. (2015), “What to expect when you’re electing”, Managerial Finance, Vol. 41 No. 10, pp. 1032-1045

Beyer, S., Jensen, G. and Johnson, R. (2004), “Don’t worry about the election – just watch the fed”, The Journal of Portfolio Management, Vol. 30 No. 4, pp. 101-109

Bordo, M.D., Dueker, M.J. and Wheelock, D. (2008), “Inflation, monetary policy and stock market conditions”, Working Paper No. 14019, NBER, May

Bredthauer, J.S., Payne, B.C., Tresl, J. and Karels, G.V. (2015), “Presidential parties, monetary regimes, and health care returns”, Managerial Finance, Vol. 41 No. 10, pp. 1059-1076

Houston, R. and Ferris, S. (2015), “Does the revolving door swing both ways? The value of political connections to US firms”, Managerial Finance, Vol. 41 No. 10, pp. 1002-1031

Hughen, J.C. and Beyer, S. (2015), “Stock returns and the US dollar: the importance of monetary policy”, Managerial Finance, Vol. 41 No. 10, pp. 1046-1058

Jensen, G., Johnson, R. and Mercer, J. (1998), “The inconsistency of small-firm and value stock premiums”, The Journal of Portfolio Management, Vol. 24 No. 2, pp. 27-36

Jensen, G., Mercer, J. and Johnson, R. (1996), “Business conditions, monetary policy and expected security returns”, Journal of Financial Economics, Vol. 40 No. 2, pp. 213-238

Johnson, R., Chittenden, W. and Jensen, G. (1999), “Presidential politics, stocks, bonds, bills, and inflation”, The Journal of Portfolio Management, Vol. 26 No. 1, pp. 27-31

Jeribi, A., Fakhfekh, M. and Jarboui, A. (2015), “Tunisian revolution and stock market volatility: evidence from FIEGARCH model”, Managerial Finance, Vol. 41 No. 10, pp. 1112-1135

Malone, C.B., Anderson, H. and Cheng, P. (2015), “Firm size and the political cycle premium”, Managerial Finance, Vol. 41 No. 10, pp. 1077-1095

Niederhoffer, V., Gibbs, S. and Bullock, J. (1970), “Presidential elections and the stock market”, Financial Analysts Journal, Vol. 26 No. 2, pp. 111-113

Patelis, A.D. (1997), “Stock return predictability and the role of monetary policy”, Journal of Finance, Vol. 52 No. 5, pp. 1951-1972

Reilly, F.K. and Drzycimski, E.F. (1976), “Vote Republican: if you want the market to rise after election day”, Barron’s, October 18, pp. 5-18

Santa-Clara, P. and Valkanov, R. (2003), “The presidential puzzle: political cycles and the stock market”, Journal of Finance, Vol. 58 No. 5, pp. 1841-1872

Smirlock, M.J. and Yawitz, J.B. (1985), “Asset returns, discount rate changes, and market efficiency”, Journal of Finance, Vol. 40 No. 4, pp. 1141-1158

Stoian, A. and Tatu-Cornea, D. (2015), “What do European stock markets prefer? Left or right governments?”, Managerial Finance, Vol. 41 No. 10, pp. 1096-1111

Sy, O. and Zaman, A. (2011), “Resolving the presidential puzzle”, Financial Management, Vol. 40 No. 2, pp. 331-355

Thorbecke, W. (1977), “On stock market returns and monetary policy”, Journal of Finance, Vol. 52 No. 2, pp. 635-654