Political Preferences and Financial Market Equilibrium

We develop a model of competitive financial markets where investors hold opposing political preferences and firms choose political stances that generate non-pecuniary payoffs. In equilibrium, firms cater to the investor group with the greatest price impact, leading to endogenous corporate polarization. This behavior exacerbates distortions in risk sharing and increases the partisan divide across investor portfolios. Value maximizing political stances do not necessarily maximize utilitarian social welfare. The interaction between cash flow effects and non pecuniary payoffs from corporate political stances generates expected stock return differences between partisan and politically neutral firms, which may be either positive or negative.