Partisan Politics and Stock Market Capitalization

Abstract

Conventional wisdom assumes that pro-labor left-wing politics frightens investors. Literature challenging the traditional approach shows that a pro-labor government encourages investment to create job opportunities to promote labor income. This study argues that the effect of partisan balance of power on the stock market is conditional upon the size of the fixed capital investment. The empirical analysis, with the data of advanced industrial democracies from 1988 to 2007, indicates that a left-wing party in power promotes stock market investment when the size of fixed capital investment is small, while the effect of partisanship disappears with the large amount of fixed capital investment.