Corporate executives offer more optimistic business forecasts if politically aligned with U.S. president

TOPEKA — Business executives whose political beliefs align with those who serve as U.S. president tend to express this partisan affinity through more optimistic business forecasts and disclosures, university researchers say.

Business officials, whether they are supporters of Republican or Democratic presidents, have a tendency to inflate forecasts when they are supporters of the occupant of the White House, according to research published by faculty at the University of Kansas and San Diego State University.

“Even the most experienced financial market participants are susceptible to biases that affect their decision-making,” said Mehmet Kara, an assistant professor of accounting at KU. “Even CEOs, business savvy as they may be, can get overwhelmed by partisan fervor.”

The academic investigation led to the publication of an article on “Political Excitement and Corporate Disclosure” in the Journal of Accounting and Economics.

Kara and Adi Masli, along with San Diego State University’s Yaoyi Xi, found that partisan-leaning CEOs used a more upbeat tone in their company disclosures when the president also shared the views of these business leaders. Given their tendency to be overly optimistic, more partisan CEOs tend to overstate assets and understate liabilities, the researchers said.

Higher partisan alignment could also lead to an overestimation of a project’s future rewards and an underestimation of the magnitude of potential losses, the researchers said.

“They think, ‘My guy is leading the country, so everything’s better.’ Or, ‘Another guy is leading the country, so we’re all screwed.'” “This focus is causing business leaders to 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, then you’re going to exhibit that behavior.”

KU and SDSU researchers examined campaign finance donations to determine political allegiance. Relying on information from the nonpartisan, nonprofit Center for Responsive Politics, which runs the OpenSecrets website, they were able to track presidential campaign donations since the 1990s. The CRP draws on data from the Federal Election Commission.

They use these sources to identify CEOs who have contributed to presidential campaigns and to count donations to Democratic and Republican recipients.

“By documenting this over time, we were able to create an index of core Republican CEOs who have been donating to the Republican Party, core Democrats who have been donating to the Democrats, and ‘moderates’ who tend to be more candidate-based. ’, Carla said.

Previous research has examined the impact of CEO overconfidence and the ways in which CEOs run companies based on their identification with political parties.

Carla said the new index allows for CEO confidence levels to fluctuate over time, given the likelihood of a presidential administration changing every four years.

“Our research went a step further and looked at a phenomenon where if their beliefs align with the president’s beliefs, it affects how they forecast and disclose information,” Kara said. “If you believe that a CEO’s decision has a tangible results, then it’s important to track that.”

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