Corporate executives with political beliefs aligned with the person serving as president of the United States tend to express that partisan affinity with more optimistic business forecasts and disclosures, university researchers say.

Research published by faculty at the University of Kansas and San Diego State University indicated business officers, whether identified as supporters of Republican or Democratic presidents, had a propensity to inflate projections when a fan of the occupant of the White House.

“Even the most experienced financial market participants are susceptible to biases that affect their decision making,” said Mehmet Kara, a KU assistant professor of accounting. “Even CEOs, as business savvy as they might be, can get swept up in partisan euphoria.”

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

Kara and Adi Masli of KU as well as Yaoyi Xi of San Diego State found partisan-aligned CEOs used a more optimistic tone in corporate disclosures when the president also shared views of those business leaders. Given their tendency to be over-optimistic, the researchers said, the more partisan-aligned CEOs were prone to overvaluing assets and undervaluing liabilities.

Higher partisan alignment could also lead to overestimating future returns of projects and underrating the degree of potential losses, the researchers said.

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

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

They used these resources to identify CEOs who made contributions in presidential races and calculate donations to Democratic and Republican recipients.

“By chronicling this throughout time, we were able to create an index of hardcore Republican CEOs who have always donated to the Republican Party, hardcore Democrats who have always donated to the Democratic Party and ‘moderates’ who tend to be more candidate-based,” Kara said.

Previous studies had examined the influence of CEO overconfidence and the manner in which a CEO ran a company based on identification with a political party.

Kara said the new index allowed for fluctuating levels of CEO confidence over time given potential for change in presidential administrations every four years.

“Our study goes one level beyond that by examining a phenomenon where, if there’s an alignment between their beliefs and the president’s beliefs, it would influence the way in which they forecast and provide disclosure,” Kara said. “If you are someone who believes CEO decisions have tangible outcomes that affect financial markets, then that’s something important to keep track of.”

This story was originally published by the Kansas Reflector, a States Newsroom affiliate. 

The post Corporate executives offer rosier business forecasts if politically aligned with a U.S. president appeared first on Missouri Independent.

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