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

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

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The positive correlation between stock ownership rates and the Republican share of the House vote and the negative one between stock ownership and equity fund costs imply a negative relationship between the Republican vote share and the equity fund costs. Indeed, a downtrend in equity fund costs has coincided with of slightly led an up-trend in the Republican House vote share since the late 1980s (Figure 3). Other data suggest a link between stock investors and voting. For example, much of the voter shift toward Republicans has occurred among the middle class, who have posted the largest rises in stock ownership rates since the late 1980s. Nadler (1999), Rasmussen Research (2000), and Zogby International (2000) noted polls showing a strong link between stock ownership and voting. (4)

Nevertheless, some changes in the vote share in Figure 4 likely stem from short-run factors such as midterm elections, income growth swings, and presidential approval. We analyze how such factors affect changes in the vote share along with information from the long-run link between equity fund costs and the House popular vote share.

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B. Empirical Approach to Testing for Long-Run Relationships

Cointegration techniques are used given evidence of a unit root in key long-run variables. The Republican share of the House popular vote has a unit root according to augmented Dickey-Fuller (ADF) tests, whether or not the tests allow for a deterministic time trend in this variable, while stock mutual fund costs exhibit a unit root allowing for a time trend (Table 1). (5) We use the Johansen-Juselius approach rather than the dynamic ordinary least squares approach due to the upward shift in Republican share near the end of our 1954-2004 sample, which starts when revised expense ratios on mutual funds became available.

These tests reflect two considerations. First, we focus on results not allowing for deterministic time trends in the variables because allowing for a trend in the vote share implicitly allows the variance of this variable to increase without bound. Such an assumption would be at odds with the 0% and 100% share range of this variable and the implications of median voter theory that the parties be competitive with one another. Nevertheless, qualitatively and quantitatively similar results for the House popular vote are obtained, allowing for possible deterministic trends in the variables (Appendix Table A1). A second consideration is that since the sample has 26 elections, vote fluctuations from short-run factors may affect long-run coefficient estimates. Accordingly, we use vector error correction models (VECMs) to jointly estimate the long-run relationship in a cointegrating vector and short-run effects in first-difference equations, respectively:

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where the lags of first-difference endogenous variables minimize the Akaike information criterion (AIC), X is a vector of exogenous factors, [[epsilon].sub.it] are residuals, and the [[lambda].sub.i], [[gamma].sub.i] and [[delta].sub.i] are row vectors of coefficients.