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Political Polarization and Finance

Author

Listed:
  • Elisabeth Kempf

    (National Bureau of Economic Research, Cambridge, Massachusetts, USA
    Centre for Economic Policy Research, London, United Kingdom
    Harvard Business School, Cambridge, Massachusetts, USA)

  • Margarita Tsoutsoura

    (Olin Business School, Washington University in St. Louis, St. Louis, Missouri, USA
    National Bureau of Economic Research, Cambridge, Massachusetts, USA
    Centre for Economic Policy Research, London, United Kingdom)

Abstract

We review an empirical literature that studies how political polarization affects financial decisions. We first discuss the degree of partisan segregation in finance and corporate America, the mechanisms through which partisanship may influence financial decisions, and the available data sources used to infer individuals’ partisan leanings. We then describe and discuss the empirical evidence. Our review suggests an economically large and often growing partisan gap in the financial decisions of households, corporate executives, and financial intermediaries. Partisan alignment between individuals explains team and financial relationship formation, with initial evidence suggesting that high levels of partisan homogeneity may be associated with economic costs. We conclude by proposing several promising directions for future research.

Suggested Citation

  • Elisabeth Kempf & Margarita Tsoutsoura, 2024. "Political Polarization and Finance," Annual Review of Financial Economics, Annual Reviews, vol. 16(1), pages 413-434, November.
    • Handle: RePEc:anr:refeco:v:16:y:2024:p:413-434
    DOI: 10.1146/annurev-financial-110921-010439
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    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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