Topeka — Corporate executives with political beliefs aligned with the person who serves as President of the United States tend to express that partisan affinity with more optimistic business forecasts and disclosures, university researchers say.
Research published by faculty at the University of Kansas and San Diego State University showed that whether they identified as supporters of Republican or Democratic presidents, businesspeople tended to inflate forecasts when they were a fan of the resident of the White House were.
“Even the most experienced financial market participants are prone to biases that influence their decision-making,” said Mehmet Kara, assistant professor of accounting at KU. “Even CEOs, no matter how savvy, can get caught up in partisan euphoria.”
The academic investigation led to the publication of an article on “Political Euphoria and Corporate Disclosures” in the Journal of Accounting and Economics.
KU’s Kara and Adi Masli and San Diego State’s Yaoyi Xi found that pro-partisan CEOs used a more upbeat tone in company disclosures when the president also shared views about those company leaders. Given their tendency to be overly optimistic, the researchers said, the more partisan CEOs tended to overvalue assets and undervalue liabilities.
Greater partisanship could also lead to overestimating future returns from projects and underestimating the magnitude of potential losses, the researchers said.
“They think, ‘My guy runs the country, so everything’s a lot better.’ Or, ‘The other guy runs the country, so we’re all doomed.’ This focus causes business leaders to skew their forecasts and reports,” Kara said. “We’ve found that it doesn’t matter whether you’re a Democrat or a Republican. If your candidate is in power, then you will exhibit this type of behavior.”
Researchers from KU and SDSU examined campaign funding donations to determine political allegiances. They have been able to track presidential campaign donations since the 1990s, relying on information from the nonpartisan, nonprofit Center for Responsive Politics, which operates the OpenSecrets website. CRP uses data from the Federal Elections Commission.
They used these resources to identify CEOs who made contributions to presidential elections and calculate donations to Democratic and Republican recipients.
“By charting this over time, we were able to create an index of hardcore Republican CEOs who have always donated to the Republican Party, hardcore Democrats who have always donated to the Democratic Party, and ‘moderates’ who are more candidate-based. ‘ Cara said.
Previous studies had examined the influence of CEO overconfidence and the way a CEO runs a company based on political party identification.
Kara said the new index allows for fluctuating levels of CEO confidence over time given the potential for changes in the presidential administration every four years.
“Our study takes this a step further by examining a phenomenon where if there is a consensus between their beliefs and the President’s beliefs, it would affect the way in which they make predictions and provide disclosures,” said Kara. “If you’re someone who believes CEO decisions have tangible outcomes that impact financial markets, then it’s important to keep track.”