Economists have explicitly recognized the possibility that regulators can be captured by those they are supposed to regulate. However, the economics profession has been much more reluctant to recognize similar conflicts of interest that may exist in research in economics and finance (i.e., academic capture). Thorsten beck and Orkun Saka report on discussions and related research recently presented at the Second Political Finance Workshop in London (POLFIN).

Since the seminal work of Stigler (1971), economists have explicitly recognized the possibility that regulators can be captured by those they are supposed to regulate. That is, public sector employees who are ideally supposed to monitor private companies in order to defend the public interest may have legitimate economic incentives to act against such expectations, which leads to conflicts of interest. ubiquitous in regulation. Despite the now widespread consensus among economists that public oversight activity may end up serving private interests, our profession has been much more hesitant to recognize similar conflicts of interest that may exist in economic research and bias the scientific process towards powerful institutions with monopolies. access to confidential data sets and high-end labor market insights (Zingales, 2013; Fabo, Jančoková, Kempf & Pástor, 2021).

Building on these questions at the 2nd London Political Finance Workshop (POLFIN), Renee Adams (2021) delivered an insightful keynote address based on her past experiences as a young economist at the Federal Reserve Bank of New York. Through an auto-ethnographic lens, she reflected on her correspondence with one of the leading financial journals as she attempted to publish an article on potential governance failures in the way the Fed regulated its member banks. . Despite his serious attempts to target arbitrator concerns, it seemed the gatekeepers – some of whom were apparently well connected to the Fed – were less than willing to accept the implications his research might have had on the bank and its top. management. Discouraged by potential conflicts of interest on the part of the gatekeepers, she left the project behind as a working document. Unfortunately, this first experience went a long way to answering the question she asked at the start of her speech: “Why haven’t I written more articles on political finance?”

Along with its memorable opening speech and the fruitful discussion that followed (which you can see in the video below), this year’s POLFIN workshop brought together a set of high-quality research projects on this rather niche topic. . Below, we provide a brief summary of a few of these articles and comment on the leads that would benefit the most from future research in the future.

Politics and Finance

In Power, Control and Favoritism of Members of Congress for Businesses of Friends, Kieu-Trang Nguyen and his co-authors question the conventional wisdom that “power tends to corrupt and absolute power absolutely corrupts”. Instead, using a regression discontinuity design for the close U.S. parliamentary election, they find evidence that a politician’s victory reduces the value of shares in the companies of his former classmates by 2.8. % (Do et al., 2020). This negative effect is greatest among younger applicants, when career concerns are arguably the strongest. They explain this result by the fact that politicians reduce favors in return for connected companies in order to preserve their career prospects when they reach high-level positions. While this is certainly a surprising result, it clearly underscores the need for further research into the role of control in restricting patronage in politics.

In Does political partisanship cross borders? Evidence of international capital flows, Larissa Schäfer and her co-authors assess whether partisan perception shapes the flow of international capital. Using data on syndicated loans and equity market funds, they show the ideological alignment or distance of individual investors / lenders in the United States (based on political contributions from banks and voter registration for fund managers) to foreign governments affects their allocation of capital around the world. (Kempf et al., 2021).

Considering investments in the same country around the same foreign elections, the authors show that American banks reduce their loans after an increase in the ideological gap between their own political position (Republican or Democratic) and the political position of the new foreign government and charge higher interest. (while they are not faced with a higher default). Likewise, US mutual funds decrease portfolio allocation, again with no difference in performance. The authors also confirm the results for non-US investors (Canada and UK), although this is done with less granular data. These rather striking results nullify the old notion that partisan politics stops at the water’s edge and invite further research into how political connections (and / or shared affiliations) between countries can end. by influencing and potentially distorting the investment behavior of private actors.

In Political polarization in financial news, Ryan Israelsen and his coauthors find strong evidence of political polarization in corporate financial news (Goldman et al., 2020). By comparing the coverage in the the Wall Street newspaper to that in the New York Times over 30 years out of the 100 largest companies, they document that newspapers are more likely to cover and write positively about politically aligned companies (as measured by campaign contributions from employees and political action committees companies to candidates from the Democratic and Republican parties). For example, a WSJ article about a company that donated only to Republican Party candidates in the previous election cycle uses 20% more positive words than an NYT article, while a WSJ article about a company who donated only to Democrats Party candidates use 10% fewer positive words compared to the NYT.

This different relationship also has implications for investment and trade. Specifically, there are more transactions on days when there are more policy-induced disagreements in reporting on a specific company. Finally, by matching granular data on individual investor transactions from a retail brokerage database to newspaper circulation data based on investor zip code location, the authors find that when information about a stock appears in the newspaper an individual investor is more likely to read, the investor trades more and in the same direction as other investors who read the same newspaper. This study, alongside other recent work showing how individuals can create their own reality bubbles based on the same facts (Alesina, Miano & Stantcheva, 2020), brings a new perspective to the micro-foundations of information asymmetries. in the financial markets and invites reflection on what makes such subjective perceptions of the same financial reality survive in the long term.

Last, but not least, in The political polarization of American companies, Elisabeth Kempf and her co-authors show that the management teams of American companies are becoming more and more homogeneous on the political level, on the basis of the registers of registration on the electoral rolls of the senior executives of the S&P 1500 companies between 2008 and 2018 (Fos et al., 2021). This trend appears to be due to the fact that politically misaligned executives are more likely to leave, particularly between 2015 and 2017, while the effect is stronger in states where there is no legal prohibition against discrimination. political, in companies with low institutional ownership and those led by CEOs with longer tenures. The authors also show that the differences in political opinions of executives manifest themselves in differing beliefs about the company’s future stock market performance after political events, such as Donald Trump’s surprise victory in 2016, with Democratic leaders having a significantly higher probability of selling the company’s stock. share that the Republican executives of the same firm after this precise event.

Conclusion

The diversity of research themes presented at the POLFIN workshop was more than representative of that of the field; however, none of the articles mirror the face of our own profession (with the key exception of a recently published article by Fabo et al., 2021). Going back to Renee’s opening speech, there is certainly a bias in our academic community to “not tip the boat” and a risk of getting too close to authorities such as central banks that provide us with data and information. advices. The good news is that, unlike ten years ago, this is now the subject of open discussion; the bad news is that we only did the first (baby) step to fix this problem. We need a much broader discussion of the biases that the current institutional framework in economics / finance may inflict on scientific production, including the lack of diversity in journal editorial boards and the concentration of supervisory power between a few hands (Angus et al., 2021).

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To note: The post office gives the point of view of its authors, not the position USAPP – American Politics and Policy, nor the London School of Economics.

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About the authors

Thorsten Beck – Cass Business School
Thorsten Beck is Professor of Banking and Finance at Cass Business School in London and Research Fellow at the Center for Economic Policy Research (CEPR). He is also director of the Florence School of Banking and Finance and holder of a chair in financial stability at the European University Institute since September 2021. His main research interests are in financial intermediation, inclusion and stability. He tweets @TL_Beck_London.

Orkun Saka – University of Sussex
Orkun Saka is Assistant Professor of Finance at the University of Sussex, Visiting Fellow at LSE, Associate Fellow at Systemic Risk Center and STICERD, and Affiliate with CESifo. His main research interests are in financial intermediation, international finance and political economy. He tweets @_OrkunSaka.