Firm size and the political cycle premium

Abstract

We investigate the role of firm size in generating political cycle outcomes. Like in the U.S., New Zealand’s political cycle premium is driven by small firms; however, the results are opposite. In New Zealand, periods governed by the right of the political spectrum produce significantly higher stock returns than those from the left and this finding is primarily driven by small firms who perform particularly poorly under left-of-centre governments. We identify several explanations for the poor performance in small firms. These firms were relatively heavily affected by the move to an open, deregulated economy; they were also less able to cope with tight monetary conditions, and periods of sharply falling inflation.