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A Republican Risk Premium?

| | Posted in: Political Indicators

Is the media more likely to accentuate the negative when Republicans hold the Presidency? In their October 2004 paper entitled “Is Newspaper Coverage of Economic Events Politically Biased?”, John Lott Jr. and Kevin Hassett of the American Enterprise Institute test for political bias in the economic (durable goods, GDP, retail sales and unemployment) news coverage of American newspapers, after controlling for economic content. Using headlines from a database of newspaper and wire service articles from 389 newspapers covering January 1991 through May 2004 (and back to 1985 for the top ten newspapers: USA Today, Wall Street Journal, New York Times, Los Angeles Times, Washington Post, New York Daily News, New York Post, Chicago Tribune, Newsday and Houston Chronicle), they find that:

  • American newspapers tend to report the same economic news more positively when Democrats hold the Presidency. No newspaper shows pro-Republican bias, and the large national newspapers all tend to slant headlines favorably for Democrats.
  • Specifically, controlling for economic content, Republican presidents get 20-30% less positive coverage on average from all newspapers and 20-40% less positive coverage from the top ten papers than do Democrats.
  • There is no evidence that this bias varies with a President’s approval rating.
  • Media coverage relates positively to perceptions about the economy. Partisan bias produces a 7-9% difference in survey respondents viewing the economy as getting better.
  • Contrary to popular belief, good economic news generates more coverage than bad news.

In summary, a pro-Democrat/anti-Republican bias in the mainstream media may affect the economic risk perception of some investors/potential investors, thereby affecting stock valuations.

This bias may reflexively offset any perception that Republicans are better for business (and therefore stocks) than are Democrats. Might the migration to online news sources mitigate the impact of mainstream media bias?

A reader sent a note stating that the Media Matters article “AEI study on media bias flawed” refutes the study.

This refutation is not posted within the Social Sciences Research Network.

We contacted Mr. Hassett, who stands by the methodology and conclusions of the paper and regards the Media Matters critique as having no substantive points.

Readers may want to review the entire paper and decide for themselves whether its approach and results are reasonable, and whether the results are meaningful regarding investor sentiment and the behavior of financial markets.

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