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Fiscal Policy, Consumption Risk, and Stock Returns: Evidence from U.S. States

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  • Da, Zhi
  • Warachka, Mitch
  • Yun, Hayong

Abstract

We find that consumption risk is lower in states that implement countercyclical fiscal policies. Moreover, firms with an investor base that is concentrated in countercyclical states have lower stock returns, along with firms that relocate their headquarters to a countercyclical state. Therefore, countercyclical fiscal policies lower the consumption risk of investors and, consequently, their required equity return premium. This conclusion is confirmed by smaller declines in market participation during recessions in countercyclical states. Overall, the location of a firm’s investor base enables state-level fiscal policy to influence stock returns.

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  • Da, Zhi & Warachka, Mitch & Yun, Hayong, 2018. "Fiscal Policy, Consumption Risk, and Stock Returns: Evidence from U.S. States," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(1), pages 109-136, February.
    • Handle: RePEc:cup:jfinqa:v:53:y:2018:i:01:p:109-136_00
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    Cited by:

    1. BUI, Duy-Tung & LLORCA, Matthieu & BUI, Thi Mai Hoai, 2018. "Dynamics between stock market movements and fiscal policy: Empirical evidence from emerging Asian economies," Pacific-Basin Finance Journal, Elsevier, vol. 51(C), pages 65-74.
    2. Liu, Yang, 2023. "Government debt and risk premia," Journal of Monetary Economics, Elsevier, vol. 136(C), pages 18-34.
    3. Polyzos, Efstathios, 2022. "Examining the asymmetric impact of macroeconomic policy in the UAE: Evidence from quartile impulse responses and machine learning," The Journal of Economic Asymmetries, Elsevier, vol. 26(C).

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