Academic journal article Economic Inquiry

Do EPA Defendants Prefer Republicans? Evidence from the 2000 Election

Academic journal article Economic Inquiry

Do EPA Defendants Prefer Republicans? Evidence from the 2000 Election

Article excerpt

I. INTRODUCTION

There is an extensive body of literature documenting the effects of political interference in bureaucratic agencies. Much of this deals with the enforcement of antitrust disputes as mediated by the Federal Trade Commission. A corresponding literature on the political control of the environmental bureaucracy does not exist. However, there is a perception that the aggressiveness of Environmental Protection Agency (EPA) enforcement could vary from one administration to the next. (1) The present article aims to subject these anecdotal impressions to empirical tests. It uses the change in the price of publicly quoted companies that have civil judicial litigation outstanding with the EPA when a political event takes place, such as a presidential election, to assess the market's reaction to this event.

II. LITERATURE REVIEW

The biggest problem in doing empirical studies of the effect of political and legislative changes on stock market valuations is the fact that these changes happen slowly over a period of months or years. Given the assumption of efficient markets, stock markets should immediately reflect all available information, including the possibility of political changes. This is the reason why studies of the effect of legislation and political change on market valuations have generally found insignificant results, as in Binder (1985), Cutler (1988), Downs and Tehranian (1988), and Graddy et al. (1992). (2)

This article uses a better measure of the probability of a political event. The measure of the probability of the outcome of an election is obtained from the Iowa Electronic Market (IEM). Only Herron et al. (1999) and Knight (forthcoming) have used this data source for similar purpose before. (3) The IEM is a set of continuous double-auction markets operated by the University of Iowa Henry B. Tippie School of Business. Most of the existing literature in this field has used opinion poll data, such as Brander (1991). The disadvantages of this are well known; they are usually conducted over several days, and so do not represent the probability of the election of a candidate on a single day; they do not represent probabilities of election, but rather expected vote shares; they are not usually released daily; and finally, they have wide margins of error, especially long before an election when many people have not yet made up their minds who to support (Herron et al. 1999, pp. 58-59). These are also some of the reasons that economists are generally skeptical of surveys, preferring to rely instead on revealed preferences. The only other possibility is the use of bookmaker's odds, as used by Roberts (1990b). This still has the disadvantage that odds are not quoted daily, and so must be interpolated.

Also, the present study attempts to measure the importance of political control of the environmental bureaucracy. The existing literature focused on a variety of other federal agencies and industries.

III. DATA AND EMPIRICAL MODEL

Data

The dependent variable used here is the abnormal daily returns to the stock market price of a company that has environmental litigation outstanding on the day of an election. The idea is that if the market considers the company to be politically sensitive, then the returns to the company's shares should respond to changes in the probability of a political event as reported by the IEM. The stock market data comes from the Center for Research in Security Prices (CR Sp). (4) The article uses individual company returns, as opposed to the construction of portfolios of stocks that are then combined with data on returns to the portfolio, as used by Roberts (1990b) and Herron et al. (1999). The present paper uses interaction terms between the likelihood of political events and individual characteristics of the companies, such as the industry that they are in and the number of times they have been sued before. This is not possible when aggregate portfolio returns are used, because that would not allow the isolation of disaggregated individual company effects. …

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