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Fiscal Policy, Consumption Risk, and Stock Returns: Evidence from U.S. States

Published online by Cambridge University Press:  14 February 2018

Zhi Da ,
Mitch Warachka  and
Hayong Yun
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Abstract

We find that consumption risk is lower in states that implement countercyclical fiscal policies. Moreover, firms with an investor base that is concentrated in countercyclical states have lower stock returns, along with firms that relocate their headquarters to a countercyclical state. Therefore, countercyclical fiscal policies lower the consumption risk of investors and, consequently, their required equity return premium. This conclusion is confirmed by smaller declines in market participation during recessions in countercyclical states. Overall, the location of a firm’s investor base enables state-level fiscal policy to influence stock returns.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 1 , February 2018 , pp. 109 - 136
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Jennifer Conrad (the editor) and Mariano Croce (the referee) for helpful comments. We also thank Bo Becker, Frederico Belo, Effi Benmelech, Michael Brennan, Cristina Cella, Henrik Cronqvist, Phillip Dybvig, Antonio Fatas, Wayne Ferson, Francisco Gomes, Klaus Grobys, Harrison Hong, Eric Hughson, Christian Julliard, Andrew Karolyi, Roger Loh, Dong Lou, Joel Peress, Jeff Pontiff, Lucio Sarno, Ivan Shaliastovich, Richard Smith, Jiang Wang, Tracy Wang, Scott Weisbenner, Shu Yan, and Fan Yu for their comments as well as participants at the 2013 Sun Trust Beach Conference, the 2013 Financial Intermediation Research Society (FIRS) conference, the 2013 Rothschild Caesarea Center Conference, the 2013 China International Conference in Finance, the 2013 Auckland Finance Meeting, the 2012 European Finance Association Meeting, the 2011 Financial Research Association Meeting, and the 2011 Center for Economic Policy Research (CEPR) Summer Symposium in Gerzensee. We thank George Korniotis for providing us with state-level retail sales data and Diego Garcia for providing us with data on the state-level operations of firms. We also thank Hojong Shin for his excellent research assistance. Some of the data used in our analysis are derived from the Restricted Data Files of the Panel Study of Income Dynamics, obtained under special contractual arrangements designed to protect the anonymity of respondents. These data are not available from the authors.

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