Political Involvement, Information Costs, and Stock Market Participation

This paper examines whether politically active individuals are more likely to participate in the stock market. Our key conjecture is that politically involved individuals follow political news more actively, which increases their chances of being exposed to financial news. Consequently, their information gathering costs decline and the propensity to participate in the market increases. We find support for our hypothesis using micro-level and state-level data from the U.S. as well as cross-country data from Europe. Specifically, we find that politically involved individuals spend about 30 minutes more on news and appear more knowledgeable about the economy and the markets. Further, irrespective of their political affiliation, politically involved individuals in the U.S. are 9% more likely to participate in the stock market. Using a state's battleground status as an instrument, we demonstrate that greater political involvement causes higher participation rates