Do political preferences shape retail investors' decisions? Evidence from the Taiwan stock market

Abstract

This study investigates the impact of political preferences on retail investors' trading decisions in Taiwan, focusing on China concept stocks.¹ Utilizing detailed stock transaction data from the Taiwan Stock Exchange and electoral statistics, we examine how voting patterns in different regions correlate with local investors' trading behaviors. Our analysis reveals that investors in areas with stronger support for China-friendly coalition (known as the “pan-blue” coalition) exhibit a higher propensity to trade China concept stocks, especially around election periods. This tendency is particularly pronounced in regions transitioning from leaders aligned with the “pan-green” coalition (generally considered more China-critical) to those aligned with the pan-blue coalition. Importantly, we find that these politically influenced investment decisions often lead to suboptimal short-term trading performance, suggesting that such choices may be driven more by sentiment than rational analysis. These findings are robust to alternative specifications of political preferences and remain consistent after accounting for the uneven distribution of brokerage branches across regions. The study contributes to the behavioral finance literature by extending the research on political preferences and investment behaviors to an Asian context with complex geopolitical considerations. It demonstrates that political attitudes influence not just broad market participation but also specific stock selections tied to political ideologies, underscoring the importance of analyzing financial investment decisions through social dimensions.