THE STATE OF THE UNION AND ECONOMIC MARKETS: UNDERSTANDING POLITICAL COMMITMENT AND CREDIBILITY

Abstract

The president of the United States communicates with the public hundreds, if not thousands of times each year. One particular group who closely monitors information coming from the president is investors. However, little research has been directed at why investors trade based on political statements, even if the opinions and policy preferences in those statements are already known. This work proposes a new framework to understand the impact of non-information transmitting political statements on investor behavior, by adopting the audience cost model from international relations theory. This work then aims to understand the applicability of that theory by studying the economic impact of one of the most notable presidential speeches, the State of the Union Address. Specifically, event study analysis for the day of each speech, and regression models based on the topics contained within indicate that the Address has a statistically significant impact on investor trading behavior across market segments. These results suggest the applicability of the audience cost model to a domestic setting, and open the door to future data-driven studies on the impact of policy statements.