Does a Republican or a Low Constraints Government Yield the Best Stock Returns for Regulated Sectors ?

Abstract

This political economy paper explores the trivial question “with all else equal, what type of government yields the highest stock returns?”. Many believe that a republican executive and legislative composition can bring the greatest change due to the party’s pro business persona. This may ostensibly be true during a period of economic expansion; but there’s little evidence of this notion during a period of economic contraction, where the economy would favor a fast change regardless of whichever party is the majority. This research paper cannot unequivocally conclude which ideological composition yields the highest stock returns but it can attest to the impact of government constraints. Light government constraints during periods of economic contraction yield the highest stock returns, especially for large economically regulated industries with close ties to society such as the finance sector.