Over the last decade, political polarization has reached new heights in the United States. But is it possible for such opposition to lead to something positive? According to new research from Michigan State University, yes — especially for the stock market.
The research, published in the Journal of Financial Economics, is the first to show that political polarization exists in financial news, which stirs up disagreement among investors in a new way. And this disagreement results in a 30% spike in daily stock trading volume.
“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,” said Ryan Israelsen, research author and A.J. Pasant Fellow and associate professor of finance at MSU’s Broad College of Business.
“More importantly,” he continued, “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.”
Israelsen and his co-authors from Indiana University analyzed 30 years of the Wall Street Journal’s and the New York Times’ news coverage of the 100 largest U.S. companies. They found that these national news giants report differently when covering the same firm-level news: the WSJ reported more favorably about Republican-affiliated firms and the NYT about Democratic-affiliated firms.
With 2024 being an election year, Israelsen says the findings could inform investors with a strategy for how they consume financial news.
“Before carrying out our study, it wasn’t obvious that differing coverage would lead to more trading. For example, if most investors read both the New York Times and the Wall Street Journal, we wouldn’t expect a lot of disagreement since everybody is getting the same information. That’s not consistent with what we found,” he said. “As an investor, understanding that there is a potential political slant to financial news is important. Investors may want to broaden the set of media outlets — especially for news about stocks in their portfolios.
“Partisanship has been increasing among politicians, citizens and even public pronouncements by firms,” Israelsen continued. “With an election approaching, investors ought to keep this in mind when reading the news.”
In the study, Israelsen and his co-authors also evaluated how political affiliation impacted the likelihood of coverage, its tone and focus on good or bad news. Favorable coverage featured a more positive tone with positive words woven into longer articles, specifically about good financial news. Moreover, newspapers were more likely to publish articles following good news about affiliated firms, while omitting coverage of bad news for the same firms. The findings held true regardless of a business’s size and if they paid for advertising within the news outlet.
“With all that is happening in financial markets, newspapers have to choose what to print; they can’t cover everything,” Israelsen noted. “They may cover the same news differently or choose not to cover certain news at all. 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.”
