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

TOPEKA — Corporate executives with political beliefs aligned with the person who served as president of the United States tend to express that partisan relationship with more optimistic business forecasts and disclosures, university researchers said.

Research published by faculty at the University of Kansas and San Diego State University indicated that business executives, whether known as supporters of Republican or Democratic presidents, tended to inflate estimates when they were fans of the incumbent in the White House.

“Even the most experienced financial market participants are susceptible to biases that affect their decision making,” said Mehmet Kara, KU assistant professor of accounting. “Even CEOs, no matter how business savvy they may be, can succumb to partisan enthusiasm.”

The scholarly inquiry resulted in an article on “Political Euphoria and Corporate Disclosure” published in the Journal of Accounting and Economics.

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KU’s Cara and Adi Masley, as well as San Diego State’s Yaoi Xi, found partisan disclosures took a more optimistic tone when the president shared the views of those business leaders. Given their tendency to be overly optimistic, the researchers said, more partisan-aligned CEOs were prone to undervaluing assets and liabilities.

High partisan alignment can also boost projects’ future returns and reduce the degree of potential losses, the researchers said.

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

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KU and SDSU researchers examined campaign finance donations to determine political allegiance. They were able to track presidential campaign donations since the 1990s by relying on information from the nonpartisan, nonprofit Center for Politics, which operates the OpenSecrets website. The CRP is based on data from the Federal Election Commission.

They used these sources to identify CEOs who contributed to presidential races and to count donations to Democratic and Republican recipients.

“By chronicling this over time, we were able to compile a list of staunch Republican CEOs who always donate to the Republican Party, staunch Democrats who always donate to the Democratic Party, and ‘moderates’ based on the candidate,” Cara said.

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Previous studies have examined the effects of CEO overconfidence and the way a CEO runs a company based on political party identification.

Cara said the new index allowed for fluctuations in CEO confidence levels, taking into account the possibility of changes in presidential administrations every four years.

“Our study goes one level beyond that by examining a phenomenon where, if there is an alignment between their beliefs and the president’s beliefs, it affects the way they predict and disclose,” Cara said. “If you’re someone who believes that CEO decisions have tangible consequences that affect financial markets, it’s important to keep track of that.”

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