Capitol News

Over the past decade, political polarization in the United States has intensified. However, new research from Michigan State University suggests this division might have unexpected benefits for the stock market. Published in the Journal of Financial Economics, the study is the first to demonstrate that political polarization is present in financial news, leading to increased disagreement among investors and a 30% rise in daily stock trading volume.

Ryan Israelsen, an A.J. Pasant Fellow and associate professor of finance at MSU's Broad College of Business, stated: "We know that people consume news that matches with their political views. But this polarization isn’t expected in financial news, where the core purpose is to inform financial decisions."

Israelsen further explained: "More importantly, because most investors limit their reading to a handful of news outlets, this polarization in coverage leads to disagreement among investors, which ultimately leads to more trade. We find this to be especially true in the most Republican- and Democratic-affiliated stocks, where disagreement leads to 30% more trading volume."

The research involved analysis by Israelsen and his co-authors from Indiana University of three decades of Wall Street Journal and New York Times coverage on the 100 largest U.S. companies. They discovered differing reporting styles; WSJ showed more favorable reporting for Republican-affiliated firms while NYT favored Democratic-affiliated ones.

With 2024 as an election year, Israelsen believes these findings could help investors strategize how they consume financial news. He said: "Before carrying out our study, it wasn’t obvious that differing coverage would lead to more trading... As an investor, understanding that there is a potential political slant to financial news is important."

The study also assessed how political affiliation influenced coverage likelihood and tone. Favorable articles had a positive tone and used optimistic language within longer pieces about good financial outcomes. Newspapers were found more likely to report good news about affiliated firms while neglecting negative stories.

Israelsen commented: "With all that is happening in financial markets, newspapers have to choose what to print; they can’t cover everything... While our research does show that coverage differs across the two outlets along a political dimension, we cannot make a statement about any absolute bias."