Political Uncertainty and Institutional Herding

Citation

Gavriilidis K, Kallinterakis V & Montone M (2024) Political Uncertainty and Institutional Herding. Journal of Corporate Finance.

Abstract
Political uncertainty represents a key determinant of corporate investment decisions. In this paper, we study the relation between political uncertainty and investment from the perspective of institutional investors. Using U.S. equity holdings data from 13F filings, we find that institutional investors herd during politically uncertain times. This trading behavior is stronger when U.S. presidents are unpopular, due to their proclivity for controversial policies, and among riskier stocks. We also find that this mechanism, despite generating some excess trading, helps incorporate a risk premium into stock prices. Overall, the findings unveil a new channel through which political uncertainty affects financial markets

Keywords
Herding; Institutional investors; Political uncertainty; Presidential popularity; Stock returns

Notes
Output Status: Forthcoming

Journal
Journal of Corporate Finance