Political leaders’ absences and equity market returns: Evidence from a novel uncertainty in China

We investigate how political uncertainty influences equity market performance by leveraging the temporary absences of municipal political leaders in China, which serve as plausibly exogenous variations in political uncertainty. We find that the absence of Secretaries of Municipal Party Committees (SMPCs) and Mayors is largely uncorrelated with local economic and social development indicators, supporting their exogeneity. Our results show that stock returns decline significantly following SMPC absences, particularly in the first month. Further analysis suggests that this effect does not stem from changes in cash flows, consistent with a discount rate channel. Cross-sectional analysis shows that the decline in stock returns is more pronounced among firms in economically advanced cities, with greater political or international exposure, and among non-state-owned enterprises (non-SOEs). Overall, our findings underscore the role of unexpected political disruptions in financial markets.