Firm size and the political cycle premium
Abstract
Purpose
The purpose of this paper is to use firm-level data to examine whether the political cycle differentially relates to small vs large firms in New Zealand; a country that operates a unicameral political system has a short three-year political term and a right-of-centre stock market premium exists.
Design/methodology/approach
Using firm-level data from 1972 to 2010, the authors examine monthly returns during right-of-centre National governments and left-of-centre Labour governments. The authors apply Santa Clara and Valkanov (2003) regression analysis approach to examine the political cycle impact on firm returns.
Findings
Like in the USA, New Zealand’s political cycle premium is driven by small firms; however, the results are opposite. In New Zealand, periods governed by the right of the political spectrum produce significantly higher stock returns than those from the left and this finding is primarily driven by small firms who perform particularly poorly under left-of-centre governments.
Research limitations/implications
Small firms were relatively heavily affected by the move to an open, deregulated economy; they were also less able to cope with tight monetary conditions, and periods of sharply falling inflation. New Zealand’s three-year political term may encourage newly formed governments to implement relatively fast moving shifts in policy where a more reasoned and steady approach would be warranted.
Originality/value
This is the first paper to use firm-level data outside of the USA to examine the political cycle impact.
Keywords
Acknowledgements
JEL Classification — G14, G15
The authors would like to thank Naomi Malone for research assistance, and Ben Marshall and other participants at the School of Economics and Finance, Massey University discussion paper series for useful comments. The authors also thank an anonymous referee for very useful guidance.
Citation
Malone, C.B., Anderson, H. and Cheng, P. (2015), "Firm size and the political cycle premium", Managerial Finance, Vol. 41 No. 10, pp. 1077-1095. https://doi.org/10.1108/MF-03-2014-0083
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited