Political activism, information costs, and stock market participation

Yosef Bonaparte, Alok Kumar

Research output: Contribution to journalArticle

22 Scopus citations

Abstract

This paper examines whether political activism increases people's propensity to participate in the stock market. Our key conjecture is that politically active people follow political news more actively, which increases their chance of being exposed to financial news. Consequently, their information gathering costs are likely to be lower and the propensity to participate in the market would be higher. We find support for this hypothesis using multiple micro-level data sets, state-level data from the US, and cross-country data from Europe. Irrespective of their political affiliation, politically active individuals are 9-25% more likely to participate in the stock market. Using residence in "battleground" states and several other geographic instruments, we demonstrate that greater political activism reduces information gathering costs and causes higher market participation rates. Further, consistent with our conjecture, we find that politically active individuals spend about 30 minutes more on news daily and appear more knowledgeable about the economy and the markets.

Original languageEnglish (US)
Pages (from-to)760-786
Number of pages27
JournalJournal of Financial Economics
Volume107
Issue number3
DOIs
StatePublished - Mar 1 2013

Keywords

  • Geographic instruments
  • Individual investors
  • Information costs
  • Political activism
  • Stock market participation

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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