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The Jeffords Effect

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  • Jayachandran, Seema

Abstract

In May 2001, Senator James Jeffords left the Republican Party and tipped control of the U.S. Senate to the Democrats. This paper uses the surprise event to demonstrate what I term the "Jeffords effect": changes in the political landscape have large effects on the market value of firms. I use a firm's soft-money donations to the national parties as the measure of how the firm aligns itself politically. In this event study, a firm lost .8 percent of market capitalization the week of Jeffords's switch for every $250,000 it gave to the Republicans in the previous election cycle. On the basis of the point estimates, the stock price gain associated with Democratic donations is smaller than the loss associated with Republican donations, but the estimates are consistent with the effects being equal and opposite. The results withstand several robustness checks, and the effects appear to persist over time.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Law and Economics.

Volume (Year): 49 (2006)
Issue (Month): 2 (October)
Pages: 397-425

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Handle: RePEc:ucp:jlawec:y:2006:v:49:i:2:p:397-425

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  1. Bronars, Stephen G & Lott, John R, Jr, 1997. "Do Campaign Donations Alter How a Politician Votes? Or, Do Donors Support Candidates Who Value the Same Things That They Do?," Journal of Law and Economics, University of Chicago Press, vol. 40(2), pages 317-50, October.
  2. Randall S. Kroszner & Thomas Stratmann, . "Interest Group Competition and the Organization of Congress: Theory and Evidence from Financial Services', Political Action Committees," CRSP working papers 465, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  3. Raymond Fisman, 2001. "Estimating the Value of Political Connections," American Economic Review, American Economic Association, vol. 91(4), pages 1095-1102, September.
  4. Stephen Ansolabehere & John M. de Figueiredo & James M. Snyder Jr, 2003. "Why is There so Little Money in U.S. Politics?," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 105-130, Winter.
  5. Stephen Ansolabehere & John M. de Figueiredo & James M. Snyder, 2003. "Why Is There So Little Money in Politics?," NBER Working Papers 9409, National Bureau of Economic Research, Inc.
  6. Baron, David P, 1989. "Service-Induced Campaign Contributions and the Electoral Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 104(1), pages 45-72, February.
  7. Stratmann, Thomas, 1998. "The Market for Congressional Votes: Is Timing of Contributions Everything?," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 85-113, April.
  8. Stratmann, Thomas, 2002. "Can Special Interests Buy Congressional Votes? Evidence from Financial Services Legislation," Journal of Law and Economics, University of Chicago Press, vol. 45(2), pages 345-73, October.
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