New Research Uncovers the Impact of Partisan Politics on Company Earnings Guidance

SDSU finance professor and a team from the University of Kansas find that CEOs who are politically aligned with the U.S. president tend to be more optimistic in their management earnings guidance. 

By Suzanne Finch

The red/blue divide so common to politics and social issues in the U.S. today may have crept into matters as dry as corporate quarterly management earnings guidance say researchers at San Diego State University and the University of Kansas.

CEOs who show partisan alignment with the incumbent President of the United States (POTUS) tend to issue earnings guidance and other corporate disclosures that are more optimistic than if those CEOs were aligned with the opposite party, their findings show. 

The research, titled “Political euphoria and corporate disclosures: An investigation of CEO partisan alignment with the president of the United States,” was published in the October 30, 2022 edition of the Journal of Accounting and Economics. SDSU’s Yaoyi Xi and KU business professors Mazhar Arikan, Mehmet Kara and Adi Masli conducted the investigation to understand how changes in the political climate can affect corporate disclosures amid the rise of political polarization and uncertainty.

The researchers identified CEO political affiliations through publicly reported campaign contributions. They looked at how CEO’s political alignment with the POTUS affects their firms’ earnings guidance and financial reporting practice. 

“The POTUS plays a critical role in the U.S. economy by nominating leaders at the Department of the Treasury, Department of Commerce, and other agencies that create a significant impact on the economy and markets,” said Xi, associate professor of finance at SDSU’s Fowler College of Business. “We found that CEO’s whose political beliefs are more aligned with the sitting president generally produce more optimistic forecasts, financial reports and other disclosures than CEOs with less partisan alignment. This is important because CEOs generally drive the critical financial decisions and outcomes of the organizations they lead.” 

Putting Their Theory to the Test
To test their hypothesis of an alignment between political leanings and financial reporting, the researchers examined an array of corporate disclosures and management earnings forecasts, paying particular attention to management earnings guidance, the tone of the forecasts, and words that indicated a favorable financial outlook. CEOs generally issue these forecasts to predict how current and future economic conditions and the business climate will impact their corporation’s performance. 

The researchers determined the partisan leanings of CEOs through political contribution data from Open Secrets (formerly the Center for Responsive Politics), and identified their total individual contributions to either Democratic or Republican candidates from the years 1990 through 2018. 

“Since we studied only the alignment of the political views of the CEO with that of the U.S. president, we did not imply that this alignment affects fiscal performance of a specific organization,” said Xi. “However, our findings seem to indicate that when the CEO identifies with the same political party as the POTUS, it may stimulate overconfidence that are reflected in guidance forecasts.” 

Biases Exist in Both Parties
While the CEOs studied by the researchers tended to lean Republican, they noted similar biases in the earnings forecasts issued by CEOs affiliated with both the Democratic and Republican parties. The findings also indicated that CEOs affiliated with the same party as the POTUS issued a greater number of earnings forecasts as well.

“Regardless of party affiliation, it’s interesting to note that CEOs with positive alignments to the POTUS issued management guidance forecasts for all four quarters in the year at a rate of 1.33 times more than those CEOs affiliated with the opposing party,” said Xi. “This alone demonstrates their political affiliation is not a trivial matter.” 

Note: The authors received no external financial support for the research, authorship, or publication of this research.