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"Read My Lips . . .": Does the Tax Rhetoric of Presidential Candidates Affect Security Prices?

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  • Ayers, Benjamin C
  • Cloyd, C Bryan
  • Robinson, John R

Abstract

We investigate whether security prices reflected the tax rhetoric of opposing candidates during the 1992 presidential campaign. We use data from the Iowa Political Stock Market to measure daily changes in the likelihood that the candidate advocating a tax rate increase, Bill Clinton, would be elected. We examine the relations between changes in election likelihood and (1) daily changes in the implicit tax rate on tax-exempt bonds and (2) daily abnormal returns on dividend-yielding stocks. We find that changes in the implicit tax rate on tax-exempt bonds are positively related to changes in the probability of Clinton's election. We also report that abnormal returns for dividend-yielding stocks are negatively associated with changes in the probability of Clinton's election. These findings suggest that security prices reflect the expected changes in tax policy implicit in the tax rhetoric of presidential candidates as the political fortunes of the candidates change throughout the campaign.

Suggested Citation

  • Ayers, Benjamin C & Cloyd, C Bryan & Robinson, John R, 2005. ""Read My Lips . . .": Does the Tax Rhetoric of Presidential Candidates Affect Security Prices?," Journal of Law and Economics, University of Chicago Press, vol. 48(1), pages 125-148, April.
  • Handle: RePEc:ucp:jlawec:y:2005:v:48:i:1:p:125-48
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    File URL: http://dx.doi.org/10.1086/425593
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    References listed on IDEAS

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    1. Ellison, Sara Fisher & Mullin, Wallace P, 2001. "Gradual Incorporation of Information: Pharmaceutical Stocks and the Evolution of President Clinton's Health Care Reform," Journal of Law and Economics, University of Chicago Press, vol. 44(1), pages 89-129, April.
    2. Froot, Kenneth A., 1989. "Consistent Covariance Matrix Estimation with Cross-Sectional Dependence and Heteroskedasticity in Financial Data," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(03), pages 333-355, September.
    3. Daniel R. Feenberg & James M. Poterba, 1991. "Which Households Own Municipal Bonds? Evidence From Tax Returns," NBER Working Papers 3900, National Bureau of Economic Research, Inc.
    4. Peter Fortune, 1996. "Do municipal bond yields forecast tax policy?," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 29-48.
    5. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    6. Alan J. Auerbach, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 93(3), pages 433-446.
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    Cited by:

    1. Lorenz Kueng, 2014. "Tax News: The Response of Household Spending to Changes in Expected Taxes," NBER Working Papers 20437, National Bureau of Economic Research, Inc.

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