Partisan Investment Cycles

This paper studies the relation between alignment in partisan affiliation between a firm's management team and the president and corporate investment. Survey evidence suggest that households have higher expectations of economic growth when their preferred party controls the presidency. I therefore investigate whether finance professionals, specifically corporate managers, are subject to the same partisan-based optimism and make investment decisions not based on fundamentals. Consistent with the behavior displayed by the general public, I find that managers invest more and become more optimistic about their companies' prospects when their preferred party is in power. Using insider trades, I am able to separate optimism from alternative explanations such as industry sorting of partisan managers, political connections, etc. This optimism-driven increase in investment is associated with lower profitability and stock returns. Overall, managers' partisan beliefs produce heterogeneous expectations about future cash flows and distort investment decisions.