Nº 20-26: Propagation of Political Information

We identify an important channel through which political information propagates into capital markets—Washington policy analysts (WAs). WAs monitor political developments and produce research to interpret the impact of these events. Institutional clients generate superior returns on their trades and channel more commissions to brokerages providing policy research. WA policy research reports evoke significant market reactions, and sell-side analysts with access to WA research issue superior stock recommendations. These effects are particularly acute in politically sensitive industries, in periods of high political uncertainty, and when the quality of WA is higher. Overall, we uncover a new conduit through which political information filters into asset prices.