Political Ideology and Professional Judgement

Abstract

In recent years, the United States has experienced heightened political polarization, characterized by deepening ideological divisions between political parties and their supporters. Individuals’ beliefs and behavior are often shaped by their political ideology. This thesis consists of two chapters that examine how political ideology influences the professional judgment of two important capital market participants: financial analysts and top bank executives, respectively.

In Chapter 1, I examine the influence of analysts’ political ideologies on their professional judgments, particularly in response to firms’ negative ESG incidents. I hypothesize that analysts with Democratic-leaning political ideology are more likely to view negative ESG events as detrimental to firm value. The results indicate that relative to their Republican-leaning counterparts, Democratic-leaning analysts are more inclined to lower their stock recommendations, earnings forecasts, and long-term growth forecasts following firms’ negative ESG incidents. The difference in reaction from Democratic- and Republication- leaning analysts is diminished when the ESG incidents have more severe consequence and when firms are followed by more experienced analysts and have greater ownership by ESG sensitive investors. The findings reveal how political beliefs influence professional judgment in financial markets and highlight the role of analyst characteristics in ESG-related information processing.

In Chapter 2, I examine how the partisan alignment between top bank executives and the President of the United States affects banks’ recognition of loan loss provisions. I show that top bank executives recognize significantly less loan loss provisions when their partisanship is more aligned with that of the US president. This negative association is less pronounced for banks with a higher degree of political misalignment within the top executive team and with more conservative practice. In addition, I show that the partisan alignment of bank executives and US president leads to less timely recognition of loan loss provisions and increased risk-taking by banks. The study provides evidence on how the partisanship alignment of top bank executives and the President can shape their perceptions of borrowers’ economic prospects and credit risk.

This thesis is related to the literature on how political ideology shapes individuals’ professional judgment by examining the decisions of financial analysts and top bank executives (Hutton, Jiang, and Kumar 2014; Elnahas, Gao, Hossain, and Kim 2023; Dong, Li, Xie, and Zhang 2018; Kaustia and Torstila 2011; Sheng, Sun, and Wang 2024; Meeuwis, Parker, Schoar, and Simester 2022; Kempf, Luo, Schäfer, and Tsoutsoura 2023; Dagostino, Gao, and Ma 2023). Considering the important roles played by these two groups of capital market participants, the influence of political ideology on their professional judgement can carry significant implications.

Date of Award	30 Dec 2024
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Zheng WANG (Supervisor)