Stock ownership and congressional elections: the political economy of the mutual fund revolution

Economic Inquiry, July, 2008 by John V. Duca, Jason L. Saving

[FIGURE 7 OMITTED]

To see if stock ownership and income differentials could account for southern voting patterns, cointegration tests were run using VECMs that include similar sets of exogenous variables as in the national models with two differences. First, the log of SINCSHARE is included as a long-run variable. Second, to control the permanent shift toward the Republican Party associated with the civil rights movement in the early 1960s, VECMs include CIVILRIGHTS, which equals 0 before 1962, 1/2 in 1962, and 1 since 1964. Since this variable is not really endogenous and would not be reasonable to model among the long-run variables in a VECM, it is included as an exogenous variable. By its construction, CIVILRIGHTS has a long-lasting effect on short-run changes, in Republican vote share which effectively corrects for the tendency of SINCSHARE and MFCOST by themselves to underpredict the Republican vote share since the early 1960s.

As with the national results, eigenvalue and trace statistics indicate the existence of only one significant cointegrating vector using each set of exogenous variables and assuming no time trends in the variables or vector (Table 3). In each case, a lag length of 1 minimized the AIC and CIVILRIGHTS is included. The sets of exogenous variables differ from the national sets in excluding the insignificant REALINCOME variable in the fourth set. In each case, equity fund costs are significantly and negatively related to Republican voting share (Table 3), and relative southern income is significant, with the hypothesized positive sign. The implied equilibrium relationships also line up well with log-level vote shares when adjusted for estimated impact of the civil rights variable, which is statistically significant as an exogenous variable (Models 5-8, Table 4). For example, the implied equilibrium relationship from the VECM including MIDTERM and REALINCOME (Model 6 in Tables 3 and 4) adjusted for estimated civil rights effects tracks the Republican popular vote share in the South (Figure 8), and similar results are obtained using the VECM including MIDTERM and PRESAPPROVAL (not shown).

B. Short-Run Movements in Southern Popular Vote Share

Following the national House analysis, we examine short-run changes in the Republican Southern vote share using the same set of VECMs used to estimate long-run relationships and compare these models with results from OLS conventional models. The latter contain similar sets of short-run variables as their VECM counterparts along with the first difference of the vote share to mirror the lag length of 1 on first-differences long-run variables in the VECMs. This lag length implies a sample of 1958-2004. One difference between the corresponding groups of models is that the conventional models include the first difference of the civil rights variable, which is significant in conventional models that focus on tracking just changes in vote share. In contrast, the level version of CIVILRIGHTS, which was designed to control for the long-run influence of civil rights effects in the long-run portion of the mutual fund VECMs, was insignificant but did not yield any other qualitatively different result (a table of results is available upon request).