Partisan alignment of CEOs and US president increases biased optimism in corporate disclosures
LAWRENCE — With essentially a 50/50 split in both the House and Senate, the country’s political leanings remain equally divided. But for many business leaders, key decisions are based primarily on who is occupying the White House.
“Even CEOs, as business savvy as they might be, can get swept up in partisan euphoria,” said Mehmet Kara, assistant professor of accounting at the University of Kansas.
“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.”
That is revealed in his new article titled “Political Euphoria and Corporate Disclosures: An Investigation of CEO Partisan Alignment with the President of the United States.” It examines how such alignment between chief executive officers and the U.S. president influences corporate disclosure outcomes, finding evidence that aligned CEOs display greater optimism in their disclosures. It appears in the Journal of Accounting & Economics.
Co-written with Adi Masli and Mazhar Arikan of KU and Yaoyi Xi of San Diego State University, Kara’s research also observes if one party or the other proved more susceptible to this “political euphoria.”
“We found it doesn’t matter whether you’re a Democrat or Republican,” Kara said. “If your candidate is in power, then you’re going to exhibit this type of behavior.”
It is no mirage that partisanship seems worse than ever before. An August survey by Pew Research Center confirms negative sentiment about the opposing party’s policies being harmful to the country remains a primary factor in why Democrats and Republicans choose to affiliate with their party.
Are America’s corporate leaders more partisan than ever before?
He said, “It has unfortunately gotten to where some of these surveys such as Pew show it is the primary identifier for many individuals, even above and beyond religion, race or ethnicity. People will forego their religious beliefs to make sure what they’re doing aligns with their partisan beliefs. So not only is it American business leadership, American life has become extremely partisan.”
Kara’s team scrutinized donations to determine political allegiances.
“Thankfully, we live in a society where everything is still fairly transparent,” he said.
Thus, any political contributions made above a certain dollar amount are catalogued, recorded and available for public disclosure. He utilized information located at the Center for Responsive Politics, which has kept track of every presidential donation since the 1990s.
“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,” he said.
Given the number of one-percenters who are CEOs, it might be assumed they typically favor Republican politicians. Interestingly, their allegiance is not as one-sided at people might think.
“There have been previous studies that show whether CEOs identifying with one party or the other influences the way in which they run the company,” Kara said. “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 also noted previous studies weighing the effects of CEO overconfidence. Yet in those analyses, the measure of overconfidence has always been something intrinsic to the individual that is not changing over time. You’re either confident because that’s your personality type … or you’re not.
“We bring in a new measure that changes with time because every four years there’s potential for regime change. And every four years you could have a CEO who flips from being confident about business conditions to not being so confident. If you are someone who believes CEO decisions have tangible outcomes that affect financial markets, then that’s something important to keep track of,” he said.
A native of Trabzon, Turkey, Kara has been with KU since 2019. He predominantly focuses on tax research as part of the university’s Accounting academic area.
The professor emphasizes people should not assume that successful business professionals are free from favoritisms – some of which are based on ideology, not information.
Kara said, “Even the most experienced financial market participants are susceptible to biases that affect their decision making.”