How US Political Divisions Shape Global Investing

We must stop politics at the water’s edge,” famously argued Arthur Vandenburg, the late US senator (Republican, Michigan) and one-time presidential hopeful. In the early days of the Cold War, Vandenburg’s campaign for a bipartisan approach to US foreign policy shaped international relations for decades.

But even if the United States has been officially bipartisan in foreign policy, its global lending practices have reflected the widening domestic partisan divide. Research by Chicago Booth’s Elisabeth Kempf, Erasmus University Rotterdam’s Mancy Luo, Frankfurt School of Finance & Management’s Larissa Schäfer, and Cornell’s Margarita Tsoutsoura suggests that political ideology affects the lending and investing activities of US banks and money managers doing business internationally.

Kempf, Luo, Schäfer, and Tsoutsoura measured investment behavior by banks and fund managers identified as Democratic or Republican around foreign elections. For instance, if a liberal party took over from a conservative one in any given country, the researchers analyzed the change in investing behavior toward that country among the Democratic- and Republican-identified banks and funds.

To measure the political ideologies of foreign governments, they drew on the widely cited Manifesto Project Dataset, which covers 1,000 political parties in more than 50 countries beginning in 1945. They focused on 208 elections in 49 countries from 2000 to 2018.

Banks’ contributions from political action committees and individuals, as compiled by the nonprofit Center for Responsive Politics (now OpenSecrets), indicated their partisan tendency. Voter registration records allowed the researchers to identify party affiliations of managers at US-based international mutual funds.

They then tested whether finance professionals who shared an ideology with the party in power of a specific foreign country would be more positive about investing in that country. For example, a Republican-identified bank supplying corporate loans to a country with a more right-wing government might expect lower default levels than it would from a left-leaning administration; or money managers might expect higher returns from stocks in countries that align with their politics.

When it came to banks, Kempf, Luo, Schäfer, and Tsoutsoura find that the less aligned they were politically with a country, the less likely they were to make corporate loans there. Specifically, when an election widened the political divide between a bank and a country, the bank reduced its lending volume to that country by an average of 21 percent and the number of loans by 9 percent relative to banks that were more politically aligned with the country. The closer the election results and the more intensive the media coverage, the greater the effect, supporting the notion that this behavior is indeed induced by the election outcome.