Government spending, political cycles, and the cross section of stock returns

Frederico Belo, Vito D. Gala, Jun Li

Research output: Contribution to journalArticlepeer-review

167 Scopus citations


Using a novel measure of industry exposure to government spending, we show predictable variation in cash flows and stock returns over political cycles. During Democratic presidencies, firms with high government exposure experience higher cash flows and stock returns, while the opposite pattern holds true during Republican presidencies. Business cycles, firm characteristics, and standard risk factors do not account for the pattern in returns across presidencies. An investment strategy that exploits the presidential cycle predictability generates abnormal returns as large as 6.9% per annum. Our results suggest market underreaction to predictable variation in the effect of government spending policies.

Original languageEnglish (US)
Pages (from-to)305-324
Number of pages20
JournalJournal of Financial Economics
Issue number2
StatePublished - Feb 2013

Bibliographical note

Funding Information:
We thank Viral Acharya, Raj Aggarwal, Santiago Bazdresch, John Boyd, Michael Brandt, Lauren Cohen, Joshua Coval, Murray Frank, Bob Goldstein, Francisco Gomes, Jo ao Gomes, Annette Vissing-Jorgensen, Samuli Knupfer, Igor Makarov, Stijn Van Nieuwerburgh, Francisco Palomino, Dimitris Papanikolaou, Raghuram Rajan, Tarun Ramadorai, Elias Rantapuska, Nikolai Roussanov, Stephen Schaefer, Jeremy Stein, Johan Walden, Joel Waldfogel, Mungo Wilson, Motohiro Yogo, Jianfeng Yu, Lu Zhang, and Yinglei Zhang for helpful comments. We are especially grateful to the anonymous referee and François Gourio for constructive comments that have improved the paper. Finally, we also thank seminar participants at the Adam Smith Asset Pricing Conference, European Summer Symposium in Financial Markets, China International Conference in Finance, European Finance Association, Financial Intermediation Research Society Conference, London Business School, Harvard University, Panagora Asset Management, University of Minnesota, and University of Nottingham for comments. We gratefully acknowledge the financial support from the Carlson School of Management Dean's Small Research Grant, London Business School, and the Crowell Memorial Prize from Panagora Asset Management. All errors are our own.


  • Asset pricing
  • D57
  • E62
  • G12
  • G18
  • Government spending
  • Input-output analysis
  • Political cycles


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