Partisan Bias Is Messing With Asset Prices

(Bloomberg) -- Politics seems to be seeping into everything these days, and new research suggests partisanship is even shaping asset prices.

Party bias alters financial analysts’ evaluation of corporate creditworthiness, based on a database created and analyzed by Elisabeth Kempf at the University of Chicago and Margarita Tsoutsoura at Cornell University. Analysts who aren’t in the president’s party are more likely to downgrade their ratings, an effect more pronounced in periods of high partisan conflict. The changed ratings are less accurate, but that doesn’t stop them from feeding through to asset prices.

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“The stock market does not seem to correct analysts’ ideological bias,” the authors write in a National Bureau of Economic Research working paper. “Rating actions by partisan analysts have price effects, and can therefore distort firms’ financing and investment decisions.”

Partisan Bias Is Messing With Asset Prices

The authors compile a sample of 449 corporate credit analysts at Fitch Ratings, Moody’s Investors Service and S&P Global Ratings between 2000 and 2015, along with party affiliations. They compare analysts rating the same firm at the same point in time to arrive at their results, and use the Federal Reserve Bank of Philadelphia’s Partisan Conflict Index to show that the effect of bias is stronger when partisan divides are greater.

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