Corporate executives offer rosier business forecasts if politically aligned with a U.S. president

TOPEKA — Corporate executives who share political beliefs with a person serving as president of the United States tend to express a partisan relationship with more optimistic business forecasts and disclosures, university researchers say.

Research published by faculty at the University of Kansas and San Diego State University suggests that business executives who identify as supporters of either a Republican or Democratic president tend to be fans of the White House occupant’s projections.

“Even the most experienced financial market participants are subject to biases that affect their decision making,” said KU Accounting Assistant Professor Mehmet Kara. “Even CEOs, business savvy as they may be, can get swept up in the euphoria of partisanship.”

A scholarly inquiry led to the publication of an article entitled “Political Euphoria and Corporate Disclosures” in the Journal of Accounting and Economics.

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Kara and Adi Masli of KU and Yaoyi Xi of San Diego State found that partisan-aligned CEOs used a more optimistic tone in corporate disclosures when the president shared the views of those business leaders. Given their tendency to be over-optimistic, highly biased CEOs are prone to overvaluing assets and underestimating liabilities, the researchers said.

A highly biased alignment may lead to overestimating the future returns of projects and underestimating the level of potential losses, the researchers said.

“They think, ‘My guy’s leading the country, so everything’s fine.’ Or, ‘The other guy is leading the country, so we’re all doomed.’ This focus causes business leaders to bias their forecasts and reports,” Cara said. “We’ve found that it doesn’t matter if you’re a Democrat or a Republican. If your candidate is in power, you are going to exhibit this type of behavior.

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KU and SDSU researchers examined campaign finance donations to determine political allegiance. He was able to track presidential campaign donations dating back to the 1990s by relying on information from the Center for Responsive Politics, a nonpartisan, nonprofit that maintains the OpenSecrets website. CRP receives data from the Federal Election Commission.

They used these resources to identify CEOs who contributed in presidential races and to calculate donations to Democratic and Republican recipients.

“By stratifying this across time, we were able to create an index of hardcore Republican CEOs who always donate to the Republican Party, hardcore Democrats who always donate to the Democratic Party, and ‘moderates’ who are more candidate-oriented,” Cara said.

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Previous studies have examined the influence of CEO overconfidence and the way a company is run based on the CEO’s identification with a political party.

Cara said the new index allowed for CEO confidence to fluctuate over time by allowing for change in presidential administrations every four years.

“Our study goes one step further by examining a phenomenon where if there is a match between their beliefs and the president’s beliefs, it influences the way they forecast and disclose,” Kara said. “If you’re a believer that CEO decisions have tangible results that affect financial markets, that’s important to track.”

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