“Read My Lips … ”: Does the Tax Rhetoric of Presidential Candidates Affect Security Prices?*

We investigate whether security prices reflected the tax rhetoric of opposing candidates during the 1992 presidential campaign. We use data from the Iowa Political Stock Market to measure daily changes in the likelihood that the candidate advocating a tax rate increase, Bill Clinton, would be elected. We examine the relations between changes in election likelihood and ( 1) daily changes in the implicit tax rate on tax-exempt bonds and ( 2) daily abnormal returns on dividend-yielding stocks. We find that changes in the implicit tax rate on tax-exempt bonds are positively related to changes in the probability of Clinton's election. We also report that abnormal returns for dividend-yielding stocks are negatively associated with changes in the probability of Clinton's election. These findings suggest that security prices reflect the expected changes in tax policy implicit in the tax rhetoric of presidential candidates as the political fortunes of the candidates change throughout the campaign.