You studied whether political bias creeps into credit ratings in the United States. What did you find?

We saw that alignment with a given president affected the views of credit analysts, and more surprisingly, had real consequences for companies. It actually moved prices and, therefore, can influence a firm’s investment decisions.

While a Republican president is in office, if a firm is rated by a Democratic analyst, that firm could have an increase in its cost of funding, not because it’s fundamentally riskier but because it’s covered by an analyst who has a grimmer view of the economy. We quantified these effects.

Something else we noticed, which was quite stark in the data, is that analysts tend to sort into companies and industries on the basis of their political affiliation.

So ratings analysts are forming Democratic and Republican groups?

Political-science research suggests that polarization creeps into all aspects of our life, but the workplace has been considered an area where ideologies still mix and people are forced to interact with the other side. But talking to analysts, we find they tend to work with people who have similar views of the world.

These analysts even sorted into industries. For example, an industry such as energy was primarily covered by Republican analysts, while the utilities industry had more Democratic analysts. Each of the three ratings agencies also had a different share of Democrats and Republicans. S&P had a higher share of Democrats; Moody’s had a higher share of Republicans. Fitch was somewhere in between.

These patterns have inspired us to dig deeper into how the sorting has changed over time, and how it affects companies. We’re looking at executive teams and their political homogeneity.

Wouldn’t that definitely be bad?

From a firm’s perspective, ex ante it’s not obvious. If people have similar ideologies, maybe they work better together and there’s a better information exchange. On the other hand, you might be missing an important view of the world, and seeing both sides could help you make more-efficient decisions. It could also be that the effect changes over time. Perhaps when the world is not as divided, it’s OK to have homogeneous teams, but when we’re divided, these negative effects start to show up more. The preliminary data on time-series trends indicate that polarization has increased over time on teams. The question about firm consequences, or firm behavior, is ongoing.

How did you become interested in polarization?

I fell into the topic during my PhD when studying the effects of tort lawsuits. I was in the Netherlands, and until the paper came out, I didn’t know that the way people think about tort lawsuits in the US depends on what political camp they’re in. Republicans tend to say they are frivolous and predatory; Democrats tend to say they protect consumers and investors. I didn’t have that association at all, and it made me think more of the importance of adding this political dimension.

Polarization is creating a lot of questions for economists. It’s good for the research agenda, but the goal of the research is to find ways to better understand what the consequences are—and what we can do.

Elisabeth Kempf is associate professor of finance at Chicago Booth.

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