The relationship between political connections and the mutual fund performance: Evidence from the US

This paper examines the effect of political connections between mutual fund managers and politicians on the fund performance. Using the publicly available data of individual political donations, we regard the mutual funds as politically connected when their managers make financial contributions to p...

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Bibliographic Details
Published inEconomic and Political Studies Vol. 11; no. 2; pp. 174 - 208
Main Authors Liu, Zhengkai, Hu, Debao, He, Zheng
Format Journal Article
LanguageEnglish
Published Abingdon Routledge 03.04.2023
Taylor & Francis Ltd
Subjects
Announcements
Donations
Earnings
earnings forecast
information advantage
mutual fund
Mutual funds
Political connection
Politicians
Stocks
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Summary:This paper examines the effect of political connections between mutual fund managers and politicians on the fund performance. Using the publicly available data of individual political donations, we regard the mutual funds as politically connected when their managers make financial contributions to politicians. First, we show that aggregated stock holding changes of politically connected funds predict subsequent abnormal stock returns around the earnings announcement day, implying that the political connection promotes managers' stock picking abilities. Further evidence derived from the sample of entry buys and exit sells shows that politically connected funds outperform politically non-connected funds by 82 basis points annually. Second, we provide evidence that earnings forecast accuracy for the firms whose stocks are held by politically connected funds is improved significantly when time is approaching the announcement date, highlighting the importance of political channels through which information flows between firms and the market are facilitated.
ISSN:2095-4816
2470-4024
DOI:10.1080/20954816.2022.2069334