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CHRIS DEN HARTOG
California Polytechnic State University
NATHAN W. MONROE
University of the Pacific
The Value of Majority Status:
The Effect of Jeffords’s Switch
on Asset Prices of Republican
and Democratic Firms
Using the change in party control of the Senate that resulted from Jim Jeffords’s
2001 change in party affiliation, we compare competing partisan and partyless legislative theories. We offer a reconceptualization of agenda control that provides a new
and promising basis for studying parties and policymaking in the Senate. Also, we
present a novel methodology—an “event study”—to test partisan and partyless
hypotheses. Our results show that, when Jeffords switched, the stock prices of
Republican-supported energy firms dropped and prices for Democrat-supported firms
rose, supporting the hypothesis that the majority party influences Senate decisions.
On May 24, 2001, United States Senator James Jeffords
announced that he was switching from Republican to Independent and
would vote with Democrats on organizational matters, effectively
giving majority party control of the Senate to Democrats. The announcement sent shockwaves through the political landscape and triggered
fierce denunciations from Republicans, typified by majority leader
Trent Lott’s declaration that Jeffords’s switch was “the impetuous
decision of one man to undermine our democracy. . . . It was a ‘coup of
one’ that subverted the will of the American voters who elected a
Republican majority.”1
These strong reactions are puzzling, however, from the perspective of congressional scholarship. Deeply entrenched conventional
wisdom holds that the Senate majority party does not significantly
influence legislative decisions. When stated explicitly, this view is
typically founded on arguments that senators are famously individualistic and that two key elements of Senate procedure, the filibuster and
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the open amendment process, preclude majority party influence over
the Senate agenda. Indeed, even many Senate studies that do not
espouse this view explicitly do so implicitly by omitting parties when
analyzing Senate behavior (Binder 1997; Binder and Smith 1997;
Matthews 1960; Ripley 1969; Schiller 2000a; Sinclair 1989; Smith
1989).
A number of recent works have challenged this view, arguing
that there are both theoretical and empirical reasons to believe that, at
least to some extent, the majority party does influence the chamber’s
agenda and decisions (Bargen 2004; Campbell, Cox, and McCubbins
2002; Chiou and Rothenberg 2003; Gamm and Smith 2002; Koger
2003). We enter this debate and argue that the majority party does
affect Senate decisions.
There are three novel aspects of our approach to this topic. First,
we reconceptualize agenda control, moving beyond the standard,
formalistic emphasis on procedural gatekeeping rights; instead, we
emphasize that agenda setting is a matter of bargaining between the
majority and minority parties—and the majority party has significant
bargaining advantages. Second, we study party effects by examining
the time period immediately surrounding the “Jeffords switch” (a term
we use to refer to the change in majority status that resulted from
Jeffords’s decision, rather than to his own personal switch from
Republican to Independent). The switch was a unique historical event
that created a well-controlled quasi-experimental setting in which to
study the effects of majority status.
There are any number of ways that majority status might affect
Senate behavior and thus any number of ways we might try to determine the consequences of a change in majority party control. The third
novel aspect of our approach is the way we study majority party effects.
We use a methodology called an “event study” that examines the effect
of an event on the values of relevant market assets (such as stocks)
and determines if the event had a statistically significant effect on asset
prices. Event studies are common in economics, finance, and law
journals but rare in political science; among the limited political science
examples are studies by Gilligan and Krehbiel (1988)—who showed
financial markets’ reactions to procedural choices in the House that
altered the likelihood that the final version of the Energy Tax Act of
1974 would be beneficial to the energy industry—and by Brian Roberts
(1990b)—who showed how changes in party control of the White
House and the Senate following the 1980 elections affected asset prices
of defense firms (for other examples, see B. Roberts 1990a and Schnietz
2003).
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The Jeffords switch is a prime candidate for this methodology. If
majority status matters, then we should see significant changes (at the
time of the switch) in the stock prices of firms whose interests were
likely to be better served by one party or the other (we henceforth
refer to such firms as Republican or Democratic “constituent firms”).
If majority status does not matter, then we should see no difference in
share prices before and after the switch, since the factors usually cited
as important determinants of Senate decisions—especially member
preferences of the Senate, House, and president—remained constant
across the period we examined. We studied asset prices of constituent
firms in the energy industry. Prior to the switch, the majority Republicans were working on an energy bill expected to benefit oil and gas
firms and to harm alternative energy firms. Consistent with the thesis
that the Senate majority party affects decisions, share prices of oil and
gas firms fell, while share prices of alternative energy firms rose, in
response to news of the Jeffords switch. Because we controlled for
overall changes in the market, these findings are above and beyond
any broad market changes and thus cannot be explained by factors
such as the general tendency of the market to fall when Republicans
lose power.
In the next section, we discuss procedural advantages that the
Senate majority party enjoys and how these procedural rules can give
the majority an advantage in influencing the chamber’s policy decisions.
We then elaborate briefly on why the Jeffords switch provides such a
strong opportunity for studying Senate party effects. In the third section,
we detail the hypotheses tested, and in the fourth section, we describe
the event study test used to evaluate the hypotheses. The fifth section
features the results of this test. We conclude with a discussion of the
implications of our results.
Reconceptualizing Agenda Control in the Senate
In this section, we take on the widely held belief that the Senate
majority party cannot manipulate the chamber’s agenda for its own
benefit. We dispense with the standard concept of legislative agenda
setting, in which the allocation of parliamentary rights grants proposal
and veto powers to some actors while denying them to others (cf. Cox
and McCubbins 2002, 2005; Krehbiel 1998; Romer and Rosenthal
1979; Shepsle and Weingast 1981; and Weingast and Marshall 1988).
We offer an alternative conception of Senate agenda setting that posits
that proposal and veto powers are widely shared and that the agenda is
set via bargaining between the majority and minority parties. But in
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this framework it is also the case that Senate procedures give the
majority party bargaining advantages that allow this party to exert more
influence over the agenda than can the minority party.
Accordingly, in this section, we briefly survey some of the
procedural advantages that the majority party enjoys. These advantages do not give the Senate majority party the kind of absolute agenda
control that is associated with parliamentary systems (and with the
House, at least during periods of high majority party homogeneity).
We argue, however, that these advantages do put the majority party in
a favorable position when it bargains with the minority party over the
Senate’s agenda, and the majority party thus exerts greater influence
over the agenda than does the minority party.
One can think of agenda setting as occurring at three different
stages of the Senate’s legislative process: the committee stage, the
scheduling stage, and the floor stage. The majority party enjoys agendasetting advantages at each stage.
In the Senate, as in the House, committees significantly influence
the legislative agenda. Committees are where most of the work of legislating occurs and where the fate of most legislation is decided (Endersby
and McCurdy 1996; Evans 1991). Committee chairs—members of the
majority party—wield substantial power to move proposals forward
to the floor or to keep them bottled up in committee (Evans 1991). In
addition, the chair’s mark represents an important source of agenda
influence over committee decisions, giving the chair almost complete
control of the base bill that is made open to amendment and roll-call
votes in committee. Opponents of provisions included in the mark need
to have the support of a majority within the committee to strike these
provisions, which requires securing the support of one or more members
of the majority party on the committee. The only alternative is to vote
against the motion to report the entire bill to the floor, thereby
sacrificing other items in the measure that the minority wishes to see
enacted. Clearly the bargaining advantages of the majority party begin
at the earliest stages of the legislative process in the Senate.
The majority also enjoys advantages in scheduling measures on
the floor. Despite the seeming bipartisanship of scheduling in the
Senate, Tiefer (1989) points out that, at least since the tenure of Senator
Mansfield as majority leader, it has been the recognized responsibility
of the majority leader to make unanimous consent requests and motions
to proceed to consideration of bills, making it difficult for minority
party senators to schedule bills in either of these ways without the
majority leader’s acquiescence and making it easier for the majority
than for the minority to make scheduling proposals.
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Moreover, in the event that a committee (or its chair) is not
amenable to a bill that majority leaders favor, a tactic of increasing
importance in recent years has been the use of Rule XIV to place
measures directly on the Senate calendar—from which the majority
leader can call them up—without first referring them to committee
(Evans and Oleszek 2001). This procedure has often been used for
high-priority items on the majority party’s legislative agenda (Oleszek
2004). Despite the fact that any senator nominally could use this tactic
to place a bill directly on the calendar, the majority leader’s scheduling
prerogative makes the tactic all but useless for any senator who does
not have the majority leader’s cooperation in taking a bill off the
calendar (Sinclair 1997, 34).
Of course, majority party advantages at the pre-floor stages of
the legislative process are not always sufficient to prevent proposals
that the majority opposes from showing up on the floor, given the
open amendment process and the lack of a germaneness requirement
in the Senate. But the majority party also enjoys a variety of advantages during floor consideration, some of which give majority leaders
the ability to combat hostile amendments in at least some instances.
First, there are various circumstances under which floor amendment proposals are restricted. For instance, the majority leader sometimes uses the right of first recognition to “fill the amendment tree,”
thereby preempting the minority from offering a proposal (Campbell
2004; Oleszek 2004, 232; Schiller 2000b). In addition, all amendments
to a measure must be germane once cloture is invoked, leading the
majority leader to sometimes file for cloture as early as possible during
consideration of a measure, in order to limit amendments (Oleszek
2004, 244–45; Sinclair 1997, 48; Tiefer 1989, 726–29). Also, the
provision of the Congressional Budget Act known as the Byrd Rule
stipulates that a point of order can be raised against “extraneous matter”
in budget reconciliation bills. The presiding officer, consulting with
the parliamentarian, can strike an offending provision; only a threefifths vote of the Senate can overrule the presiding officer’s decision
that a provision in the bill is extraneous. To the extent that the presiding
officer (a majority party member) biases such rulings in the majority
party’s favor and can muster 41 votes in support, this tactic can be
used to prevent the minority from advancing its agenda through
reconciliation.
Even when the minority is able to offer a hostile amendment, the
majority leader or the floor manager can offer a motion to table that
amendment. If approved by a simple majority, then this motion—which
is not debatable—has the effect of killing the amendment. Various
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Senate procedural experts describe votes on motions to table as
instances in which senators are strongly predisposed to vote the party
line, making tabling motions a tool primarily of majority leaders (Gold
2004; Marshall, Prins, and Rohde 1999; Oleszek 2004; Tiefer 1989).
Thus, the much-touted ability of individual (minority) senators to offer
amendments may not actually undermine the majority party’s ability
to influence the agenda, because offering an amendment is not necessarily equivalent to getting a vote on the substance of the amendment.
To this point, we have said nothing of the Senate’s most notorious
procedural hurdle, the filibuster. We agree that there is no sure remedy
for this potential problem for the majority party; indeed, in each
Congress there are bills that the majority party wants to pass but that
nonetheless die by filibuster (or anticipation thereof). Still, we believe,
for multiple reasons, that it is a mistake to think of the filibuster as
being akin to a minority party veto over majority party proposals. First,
the majority party’s numerical advantage means that, to invoke cloture,
it needs to buy fewer votes than does the minority party, all else
constant. Assuming this lesser requirement translates into smaller policy
concessions or side payments, it can be construed as another example
of a majority party advantage in agenda setting. Also, the majority
leader can use his or her scheduling power to credibly bargain in a
way that others cannot. The majority leader can offer to schedule
minority members’ preferred bills, to support a logroll, or to make
some other side payment to garner support for cloture. Ainsworth and
Flathman (1995) make a similar argument regarding the negotiation
of unanimous consent agreements (UCAs) by the majority leader: because
all senators want some things to get done, the majority leader can take
advantage of the first-proposer power to garner favorable outcomes.
Second, the logic of Ainsworth and Flathman’s UCA model
extends in a straightforward way to filibusters. Because all senators
have pet projects and bills that they want approved, none would be
happy with a war of all against all in which every bill were filibustered.
When deciding whether or not to filibuster, a senator must consider
what kinds of costs he or she might incur by filibustering. Sometimes
this calculation will lead a senator to refrain from filibustering even
when the senator opposes a measure. At other times, a minority senator
will accept a legislative bargain that disproportionately favors the
majority because the bargain is better than paying the costs of fighting
tooth and nail against the measure.
To be sure, there are instances in which minority senators maintain
high cohesion, prevent cloture, and thwart the majority; likewise, there
are instances in which a minority coalition hijacks the agenda and the
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majority party must accept unwanted legislation. But these occurrences
only imply that the majority party does not get its way all the time, not
that the majority party never gets its way.
To see how the majority’s procedural advantages can translate
into an overall majority party agenda-setting advantage, it is useful to
set aside some conventional ways of thinking about agenda setting.
Scholars typically think about the ability to put something on the agenda
(or to keep something off it) in absolutes. That is, some actors (for
example, legislators, committees, parties) have proposal rights and
others do not; if those actors with such rights exercise them, then their
proposals are on the agenda and that is the end of the story. Similarly,
some actors have veto power and others do not. If an actor exercises
the veto power, then the measure in question is dead.
We think a more-useful way of thinking about proposal and veto
rights in the Senate is to think of these rights as being widely shared
by all members but costly to use. All senators can make proposals, and
all senators can try to block a proposal after it has been broached. But
both making proposals and trying to block them are costly to any senator
engaging in such actions.
Our interpretation of the majority procedural advantages
described is that, in a variety of ways, they make it easier for the
majority party to propose measures than for the minority party. In
particular, the majority party enjoys the ability to make the first proposal at both the committee and scheduling stages. Assuming all
senators have bills they would like to see passed and are thus sometimes better off agreeing to a suboptimal agreement about what goes
on the agenda than they would be in the absence of any agreement at
all, then the basic logic of bargaining models (Rubinstein 1982) implies
an agenda-setting advantage for the majority: in at least some instances,
the majority party can make an initial proposal that is better for the
majority than for the minority and that also makes the minority—or at
least the filibuster pivot—better off than they would be if they rejected
the majority’s offer (since making a counterproposal would entail
opportunity costs for minority party senators, and these costs would
sometimes make minority senators worse off than if they accepted the
majority’s initial proposal).
The Jeffords Switch: A Unique Opportunity
Previous attempts to test partisan and partyless theories against
one another, both in the House and the Senate, have been beset by an
overriding problem. Prior to the Jeffords switch, changes in majority
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status in the U.S. Congress always resulted from elections, which
produced simultaneous changes in membership and preferences.
Disentangling the effects of preferences from the effects of parties has
been quite difficult, particularly because of the imprecise ways that
we measure preferences.
In the Jeffords case, there was no change in Senate membership—
or, for that matter, in House membership or in the executive. The only
thing that changed was that Jeffords declared himself an Independent
and started voting with Democrats rather than Republicans on organizational matters. In a Senate divided 50/50 prior to the switch, Jeffords’s
move changed partisan control of the chamber.2 The Jeffords switch
therefore presents a highly useful opportunity for testing divergent
hypotheses derived from partisan and partyless theories.
Of course, constant membership does not imply that preferences
remained absolutely unchanged across the 107th Senate. It is well
known that, even without shifts in party control, standard roll-callbased indexes, such as NOMINATE, sometimes reveal mid-Congress
changes in legislators’ relative placements (Hibbing 1986; Jenkins,
Crespin, and Carson 2005; Rothenberg and Sanders 2000). There is
also ample evidence that legislators who switch parties tend to vote
differently after switching (Hatcher and Oppenheimer 2003; McCarty,
Poole, and Rosenthal 2001; Nokken 2000; Nokken and Poole 2004).
Admittedly, when we compare Jeffords’s DW-NOMINATE score
for the part of the 107th Congress prior to the switch with his score for
the part after the switch, we find a noteworthy shift to the left. Using
Bayesian estimation methods, Clinton, Jackman, and Rivers (2004)
and Jason Roberts (2007) have also found that Jeffords’s voting pattern
shifted markedly to the left after he switched. These same authors,
however, have given reason to doubt that Jeffords’s underlying preferences changed, suggesting that the observed change in voting behavior
may be the result of a change in voting context. In other words, the
change may be explained by a post-switch reduction in Jeffords’s
perceived need to vote with Republican leaders on some votes and
perhaps an increase in his need to vote with Democratic leaders.
Similarly, a perceived drop in the need to accommodate Republican
activists in Vermont could have caused the change. Of course, either
of these cases would, in and of themselves, indicate that parties affect
Senate outcomes.
Even if the shift in voting behavior does reflect a change in preferences rather than in partisan pressures, there are other reasons it is
highly unlikely that there were significant alterations in the underlying
distribution of member preferences, particularly on energy matters.
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First, if we calculate Jeffords’s pre- and post-switch NOMINATE scores
using only votes during the period of our event study—that is, through
September 10, 2001—the shift in Jeffords’s voting behavior is quite
small;3 during the period for which we examine stock returns, there is
evidence of only a tiny change in Jeffords’s preferences (from .14 to
–.095).4 Second, even if we use the measures based on the entire 107th
Congress and assume that Jeffords’s preferences did shift decidedly to
the left, this shift would have had little or no effect on the positions of
the floor median or filibuster pivots. Third, and most important,
evidence indicates that on energy and environmental matters—the only
issues on which a change in Jeffords’s preferences would have changed
investors’ estimation of whether or not the energy bill was likely to
pass—Jeffords’s defection from the Republican Party made little
difference in his preferences. He had a pro-environment record throughout his many decades of service in Congress, both as a Republican and
as an Independent. His roll-call voting reflected Vermont’s strong
environmentalist sentiment even before he left the GOP, so there was
strong reason to suspect he would join other environmentalists in
opposing the Republican energy bill even if he were a Republican. For
example, in 1999 the League of Conservation Voters (LCV) rated him
as being dramatically out of line with most congressional Republicans
on environmental votes—and even rated him as being a more-ardent
environmentalist than the average congressional Democrat.5 In 2000,
Jeffords was named one of the LCV’s “Environmental Champions.”
Moreover, on the seven votes from 1999 through 2004 that CQ Weekly
identified as key votes on energy policy, Jeffords and his (Democratic)
fellow Vermont senator, Patrick Leahy, voted the same way in every
instance, providing further evidence that Jeffords’s preferences on
energy policy were constituent-driven and did not change suddenly in
May 2001.
Predictions of Partisan and Partyless Theories
Partyless theories predict no change in the set of policies likely
to pass the Senate after the Jeffords switch, since the membership and
preferences (on energy matters) of the chamber remained constant.
Partisan theories, on the other hand, imply that policies favored by
Republicans were less likely to pass after the switch than before,
whereas policies favored by Democrats were more likely to pass after
the switch than before.6
We can recast these statements as predictions about asset prices
of Republican and Democratic constituent firms. Firms’ business
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fortunes are sometimes affected by legislative decisions, and the
expected business success of any such firm is, in part, a function of
legislative decisions. Assuming a status quo that is favorable to
Democratic firms, we can draw opposing and testable predictions about
the effect of Jeffords’s switch on asset prices of Republican and
Democratic firms.7 Note that the partyless hypotheses serve as the null
hypotheses for the partisan hypotheses, and vice versa.
Partisan Hypotheses: Jeffords’s switch will have a positive effect on
the stock prices of Democratic firms and a negative effect
on the stock prices of Republican firms, all else constant.
Partyless Hypotheses: Jeffords’s switch will have no effect on the stock
prices of either Democratic or Republican firms, all else
constant.
In short, partisan theories imply that any Democrat-friendly status
quos that Republicans had not changed as of the Jeffords switch
suddenly became protected from change when Democrats assumed
majority status. If markets were expecting Republicans to change one
of these status quos to a more Republican-friendly policy and had
adjusted asset prices accordingly, then the rational reaction to the switch
would be to place a higher value on the stocks of firms expected to be
hurt by Republican policy changes prior to the switch but no longer
expected to be hurt once Democrats gained a veto. Similarly, the rational
reaction would be to place lower values on stocks of firms expected to
benefit from Republican policy changes prior to the switch but no
longer expected to benefit after the switch.
An Event-study Test of the Hypotheses
To test these hypotheses, we used an event study research design
(see MacKinlay 1997 for a recent review). Event studies can be done
in many ways. For the sake of brevity, we will minimize discussion of
many of the methodological choices we faced, but our choices follow
standard practice in the disciplines that event studies are common. We
refer the reader to our online appendix at the LSQ website (http://
www.uiowa.edu/~lsq/Den_Hartog_Monroe_Appendix) for more
details.
The dependent variable in an event study is the (rate of) Return
for a given stock or set of stocks. The return is the change in the total
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value of a security, or portfolio of securities, over some period of
time (which, in the case of most event studies, is one day). This
rate is expressed as a percentage change from the value at the
beginning of the time period. So, for example, if a stock is worth
$100 on day t–1 and is worth $101 on day t, then the rate of return
for day t is .01. If the same stock is worth $99 on day t, then the
rate of return for day t is –.01. It is important to note that this measure
captures only the one-day change and does not aggregate long-term
changes. To fully appreciate what this measurement means for event
studies, consider an example in which a stock’s value is constant
for five days, increases 100% on the sixth day, and then remains
constant for another five days. Although the stock’s value increased
by 100% across the time period, the event study dependent
variable—the one-day rate of return—is 0 for all days except the
sixth day.
Once one understands this operation, the basic idea of an event
study is straightforward. One begins by compiling a cross-sectional
time-series dataset in which the cross-sectional units are stocks of
companies of interest and the time-series unit is a day (typically within
a span ranging from roughly 100 days prior to the event until roughly
100 days after it). Intuitively, the methodology consists of little more
than using dummy variables for the day(s) when news of a given event
became public (the “event window”) to determine if the rates of return
on those days were significantly different from the “normal returns”
that would have been expected for those days in the absence of the
event.
To estimate the normal return for each day in the event window,
we regressed the sample stocks’ daily returns on the daily return of a
broad market index, using the dataset observations outside the event
window (these observations are called the “estimation window”); we
then combined the resulting estimated coefficients with the observed
market rate of return for each day in the event window to predict each
stock’s normal return for the event window day(s). Dummy variables
for the day(s) of the event detect deviations from this expected return,
which is the effect of the event.
To estimate the effects of Jeffords’s switch, we followed
convention by using generalized least squares (GLS) regression
(Schipper and Thompson 1983; see also Angbazo and Narayanan 1996,
Malatesta 1986, and McWilliams and Siegel 1997). We estimated the
model separately for Republican and Democratic firms, since the
partisan hypothesis predicts the event will have opposite effects for
each group.
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The GLS regression model is
Rit = βi 0 + βim R mt + βit Dit + εit ,
(1)
where Rit is the rate of return for firm i on day t (i = 1, 2,…, N); R mt is
the rate of return for the market index on day t, taken from the CRSP
NYSE-AMEX value-weighted index; Dit is a dummy variable equal
to 1 on the day(s) of the event; and εit is an error term (assumed to be
normally distributed and serially independent) for firm i on day t.
Note that the constant term, βi0, and the market index term, βim Rit ,
jointly estimate the normal return, and the firm-event dummy term,
βitDit, captures the effect of the event on i’s rate of return on the day(s)
of the event. The test of the sample-wide effect of the event assesses
N
whether or not the summed βitS , ∑ βit , are jointly significant in the prei =1
dicted direction and is accomplished with a simple linear combination
test. Thus, the hypotheses that we tested were that the summed effect
of the Jeffords switch was significantly less than 0 for Republican
firms and significantly more than 0 for Democratic firms.
Operationalizing Our Hypotheses8
To test our hypotheses, we needed to identify at least one policy
dimension on which the pre-switch status quo was favorable to Democratic constituent firms and the Republican majority intended to amend
this status quo to move policy rightward. Further, the policy area had
to feature publicly traded firms whose stock prices would be affected
by policy on that dimension.
We identified energy policy as the issue dimension that most
clearly fit our criteria. One of the most controversial and well-publicized
goals of the unified Republican government that emerged from the
2000 election was the opening of the Arctic Wildlife Refuge for oil
production. In fact, this ambition was the symbolic tip of the iceberg.
In the months preceding Jeffords’s switch, a much-ballyhooed Republican energy bill was working its way through Congress. Among other
things, the bill emphasized expansion of oil and gas production. It was
seen as being so generous to Republican-friendly oil and gas firms
that one journalist remarked, “when [oil and gas lobbyists] got to
Congress on Tuesday, there was little they were asking for that President
Bush hadn’t already offered them.”9 On the other hand, under the Bush
energy plan, “. . . [Democrat-favored] programs encouraging conservation and energy efficiency would lose significant funding, as would
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research into emerging technologies to produce energy from nonpolluting, renewable sources, such as wind, solar, and geothermal”
(Cooper 2001). Thus, energy was an issue dimension on which the status
quo was Democrat-friendly and was clearly targeted by Republicans prior
to the Jeffords switch. It is also a dimension for which we can identify two
different sets of publicly traded firms, one set that investors would have
expected to be helped by Republican policy and another that investors
would have expected to be hurt by Republican policy. Having chosen
energy as our issue dimension, we chose samples of 45 oil and gas
company stocks and 21 alternative-energy stocks for our analysis.
We then defined the event window (that is, the period when news of
Jeffords’s switch could have reached the markets) as May 21 through
May 24, 2001. We arrived at this window by searching a variety of sources.
First, we reviewed major newspapers from January 1 to May 24, 2001,
looking for signs that anyone expected Jeffords to switch parties. Using
LexisNexis, we searched for the word Jeffords in the full text of the “general
news” category, searching only major newspapers. This method generated
425 hits, many of which were repeat stories published in different newspapers. We then read through each article, looking for any mention of
the possibility that Jeffords might switch parties. Although his relationship with fellow Republicans was clearly strained in the months before
the switch, his move was very much a surprise when it actually occurred.
Our search revealed no hint, prior to the week of the switch, that he was
about to jump ship. This finding is consistent with the accounts of Daschle
(2003), Jeffords (2001) himself, and Jayachandran (2003).
Lacking any a priori basis for predicting when in the event window
the influence of the event should have been strongest, we coded the
dummy variables that operationalize this window in two different ways.
Our first method was to use separate dummies for each of the days in
the window, thereby treating each day as a separate event. This finegrained approach allowed us to detect significant effects on any of the
days. The alternate approach was to use a single dummy coded as 1 for
all days in the window, thereby treating the days as a joint event. The
estimation window that we used in our analysis was the set of all 174
trading days between January 1 and September 10, 2001.10
Finally, to account for the possibility of confounding events, we
searched online sources of financial news (using the LexisNexis keyword
option) for industry events affecting oil, gas, or renewable-energy stocks
during our event window. We found no evidence of contemporaneous
events affecting either set of stocks on any of these days. For similar reasons,
we examined oil prices across the period of our analysis and found neither
a distinct trend nor a sudden change at the time of the switch.
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The Effects of the Switch on Stock Prices
Table 1 presents the results of our tests for both the oil-and-gas
estimation and the renewable-energy estimation. The left-hand columns
of results show the estimated effect of the switch on oil and gas firms’
stock prices; the right-hand columns of results show the effect on
renewable-energy firms’ stock prices. The first four rows show the
estimated effect of the event for each individual day in the event window,
and the fifth row shows the joint effect for the four-day window.
For May 21, the first trading day after rumors began spreading,
there is no significant effect for oil and gas stocks. For May 22, however, which was the first day that the possibility of a Jeffords switch
was widely reported in newspapers, the effect is negative and highly
significant (with a p-value of .004). This result is consistent with the
notion that investors quickly made the connection between the increased
probability of a Democratic Senate (given rumors that Jeffords would
switch) and the likely consequences for the long-term valuation of
firms in the oil-and-gas industry.
For May 23 and May 24, as rumors that Jeffords’s switch became
more widespread and Jeffords announced his decision, it appears that
investors continued to dump oil and gas stocks. Although we cannot
quite reject the null hypothesis of no effect at the 95%-confidence
level, the coefficients for both days are negative and significant at
over 93% (with p-values of .063 and .062, respectively). Finally, as
shown in the bottom cell of the oil-and-gas column of Table 1, this
overall negative trend is also captured when we test the effect of the
four days jointly. In this joint analysis, the coefficient is again negative
and highly significant (with a p-value of .002). We can again reject the
null hypothesis of no effect in favor of the hypothesis that oil and gas
stock prices declined significantly over that period.
We turn now to the results for renewable energy stocks over the
same period. For these stocks, with separate dummy variables for each
event-window day, the coefficients for May 21, May 22, and May 23
are not significant; for those days, we cannot reject the null that the
switch had no effect. The coefficient for May 24, however, is positive
and significant (with a p-value of .002); for the day Jeffords announced
his switch, we can reject the null hypothesis that there was no effect in
favor of the hypothesis that the switch had a positive and significant
effect on renewable energy stocks. In the joint analysis of the four-day
event window (shown in the bottom-right cell of Table 1), we are unable
to reject the null hypothesis that Jeffords’s switch had no effect. This
result is not terribly surprising—and, we argue, not terribly problematic
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77
TABLE 1
Effect of Jeffords’s Switch on Oil and Gas Stocks
and Renewable-energy Stocks,
May 21 to May 24, 2001
Oil and Gas Stocks
Date
Renewable-energy Stocks
Σ Coefficients (Σ SEs) p-value
May 21
May 22
May 23
May 24
May 21–24
–.0152
(.1499)
–.3940*
(.1495)
–.2295
(.1500)
–.2306
(.1495)
–.2207*
(.0754)
.460
.004
.063
.062
.002
Σ Coefficients (Σ SEs) p-value
–.3155
(.2674)
–.0933
(.2670)
–.2844
(.2681)
.5625*
(.2667)
–.0322
(.1348)
.119
.364
.145
.018
.441
*Significant at 95% or greater level.
Notes: All p-values shown are for one-tail tests. Cells contain GLS coefficients and
standard errors, summed using linear combination tests across all stocks in the samples.
The formula to calculate the standard errors of a linear combination of coefficients
is, for example, {[se(β1hat)]2+[se(β2hat)]2+2cov(β1hat,β2hat)}1/2 (Wooldridge 2003, 141).
Results for oil and gas are based on a sample of 45 stocks; results for renewable
energy are based on a sample of 21 stocks. For each analysis, the estimation window
used is the set of all 174 trading days between January 1 and September 10, 2001.
for our conclusions. The small sample size of renewable-energy stocks,
the fact that this sample was chosen by a noisier method than was used
for the oil and gas stocks, and the lower ceteris paribus likelihood of
finding significant results when using a joint test—all these factors
increase the risk of Type II error in our analysis of renewable stocks.
Accounts by market observers corroborate the claim that the “rally” in
renewable energy on May 24, which we pick up in our day-by-day
analysis, was a reaction to Jeffords’s switch.11 Moreover, along with
news of the switch, media reports on May 24 began to note that Senator
Jeff Bingaman (D-NM), a supporter of alternative energy, would
become the new chair of the Senate Energy Committee.
Thus, the pattern of investor reactions to the Jeffords switch
indicates that the change from Republican to Democratic control of
the Senate significantly affected expectations about the future shape
of energy policy. Even when we controlled for the general trend of the
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Chris Den Hartog and Nathan W. Monroe
market, which tends to take a hit when Republicans lose office (see
Herron, Lavin, and Silver 1999 for a review), we found that oil and
gas stocks’ returns dropped significantly in reaction to the Jeffords
switch. Conversely, on the day that Jeffords announced his switch, the
returns of renewable energy stocks were significantly higher than
predicted by the market model.
These findings lend support to partisan theories of congressional
organization. Because the membership and preferences of the Senate
remained constant across the period we examined, we can be confident that the change in majority status is responsible for the observed
patterns of change in the stock prices of Democratic and Republican
constituent firms. We cannot, however, reconcile this pattern with
theories that ignore the influence of parties in the Senate. According
to partyless models, the set of bills expected to pass (and the set not
expected to pass) should have remained constant during the period
spanning Jeffords’s switch, and thus we should not have observed any
change in investor behavior.
Conclusion
The central point of our article is that, contrary to received
wisdom, the majority party affects Senate decisions in meaningful ways.
Moreover, we turn conventional thinking about Senate agenda
manipulation on its head. We argue that Senate procedures are the
source of the majority party’s ability to influence the agenda, rather than
the source of its inability to influence the agenda, as is commonly argued.
We arrive at these conclusions in large part by abandoning the
usual concept of agenda setting, in which chamber procedures grant
proposal and veto powers to some actors while denying these tools to
others. We offer an alternative conception of Senate agenda setting
wherein proposal and veto powers are widely shared and the agenda is
set via bargaining between the majority and minority parties—and in
which Senate procedures are the source of bargaining advantages that
the majority party enjoys and that allow it to exert more influence
over the agenda than the minority party can. A particularly important
advantage of the majority party is its ability to make the first proposal
at both the committee and scheduling stages.
Our results also have implications for congressional organization theories more generally. As the only instance in the history of the
United States in which majority status changed from one party to the
other while membership remained constant, the Jeffords switch
constitutes an opportunity to compare partisan and partyless theories
Majority Status
79
of congressional organization in a uniquely well-controlled setting.
As long as we assume that the market did not make a mistake, our
results demonstrate majority party policy influence even in the tough
case of the Senate—and even in the particularly tough case of a preswitch majority that emerged from a 50/50 tie and the accompanying
power-sharing agreement.
In addition, we provide direct evidence that majority status can
be valuable to a party’s constituents. In the Jeffords case, the shift in
wealth that we observe is a reality that holds true regardless of market
efficiency. In terms of real dollars and asset values, the aggregate effect
of Jeffords’s switch was enormous. From May 21 to May 24, the 45
oil and gas companies in our sample lost a total of $12.4 billion in
value; the 21 renewable-energy companies gained $600 million in value
on May 24.12 For each set of stocks, the change represented more than
2% of market capitalization.
Our emphasis on agenda setting as the product of bargaining
underscores the importance of answering various questions about the
bargaining relationship between the majority and minority parties. In
this article, we have merely scratched the surface of this topic, leaving
many relevant questions to be answered: In what ways do Senate
procedures grant bargaining advantages to the majority party? How
large are these advantages? Do they come in the form of lower proposal
costs for the majority party than for the minority party, or lower veto
costs, or both? Another set of questions revolves around variation in
the bargaining relationship: Is the relationship affected by changes in
the conditions from the conditional party government model? How
does the size of the majority affect this relationship? And ultimately,
of course, we want to know about the effects of this bargaining
relationship on policy: to what extent do majority party bargaining
advantages translate into policy advantages?
Clearly, the majority party does not always get its way in the
Senate. Under what circumstances will it fail to carry the day, and
why? All these unanswered questions indicate exactly how much work
remains to be done if we are to understand the role of Senate parties;
we believe that addressing these points will bring us much closer to
that goal.
Chris Den Hartog <[email protected]> is Assistant Professor
in the Department of Political Science, California Polytechnic State
University, San Luis Obispo, CA 93407. Nathan W. Monroe
<[email protected]> is Assistant Professor in the Department of
Political Science, University of the Pacific, Stockton, CA 95211.
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Chris Den Hartog and Nathan W. Monroe
NOTES
We thank Scott Ainsworth, Neal Beck, Cheryl Boudreau, Sean Cain, Andrea
Campbell, James Campbell, Bill Clark, Dave Clark, Gary Cox, Belinda Davis, Darren
Davis, Keith Dougherty, Karen Ferree, Chuck Finocchiaro, Clark Gibson, Bob Grafstein,
Stephen Halpern, Tom Hammond, Will Heller, Cullen Hendrix, Ric Hula, Mark Hurwitz,
Henry Kim, Thad Kousser, Gary Jacobson, Bill Jacoby, Jonathan Krasno, Chuck Lamb,
Jeff Lax, Jeff Lazarus, Franco Mattei, Jason MacDonald, Michael McDonald, Mat
McCubbins, Burt Monroe, Rebecca Morton, Jonathan Nagler, Kathryn Pearson, Rose
Razaghian, Dave Rohde, Brian Silver, Alastair Smith, Allan Timmerman, Shawn Treier,
Nick Weller, Don Wolfensberger, Frank Zagare, Lissa Ziegler, and anonymous reviewers
for helpful comments. We also gratefully acknowledge financial support provided by
NSF Grant # SES 9905224 (Principal investigators: Gary W. Cox and Mathew D.
McCubbins). Nathan Monroe serves as the contact author for this article.
1. Richard Berke, “Lott Takes Parting Shot on Eve of Senate Power Shift,” New
York Times (Sunday, Late Edition—Final, section 1, page 22, column 3; National Desk),
3 June 2001.
2. Republicans were the majority party when the Senate was divided 50/50,
since a Republican, Vice President Dick Cheney, held the tie-breaking vote. A related
question is, even if one buys into the possibility of majority party power in the Senate,
did the “power-sharing” arrangement of the early 107th Senate prevent the Republican
majority from exercising agenda influence? We believe careful examination of the
agreement’s provisions supports the view that Republicans retained influence over the
agenda. For now, however, we simply note that this question does not pose a serious
problem for us, since weaker majority influence would merely bias our test against
finding the majority effects that we find. In other words, if anything, the power-sharing
arrangement means that we have an even tougher test of partisan theories.
3. Arguably, only changes in Jeffords’s voting that occurred during this period
could drive our results. If there was little evidence during this period that Jeffords’s
preferences had changed, then there is little reason to believe that changes in stock
returns at that time could have been driven by the belief that Jeffords’s preferences had
changed.
4. We used Poole and Rosenthal’s W-NOMINATE program to generate the scores
cited in the text. For additional details of this and other NOMINATE data discussed
here, please see our online appendix on the Legislative Studies Quarterly website,
http://www.uiowa.edu/~lsq/Den_Hartog_Monroe_Appendix
5. In 1999 Jeffords voted the pro-environment position on 89% of the votes
included in the LCV scores (reported in the LCV’s National Environmental Scorecard).
The Democratic average was 76%, and the Republican average was 13%.
6. For more-formal and detailed theoretical discussions, see Brady and Volden
1998; Chiou and Rothenberg 2003; Cox and McCubbins 2002, 2005; and Krehbiel
1998.
7. As with all event studies, these predictions rest on the “efficient-markets
hypothesis”—that is, the assumption that markets react rationally to new information.
To the extent that the efficient-markets hypothesis holds in the case of the Jeffords
switch, our event study constitutes a test of partisan and partyless theories. To the
Majority Status
81
extent that this hypothesis does not hold, we merely test for a change in investors’ best
guesses about whether or not majority status matters. In drawing the conclusion that
majority status matters, we followed event-study convention, assuming that markets
acted efficiently in our case. In most of our discussion of the implications of our findings,
we leave this assumption implicit and treat our analysis as a test of the legislative
theories in question.
8. Please see our online appendix for additional methodological details of topics
discussed in this section, such as stock selection and definition of the event window.
9. Mike Soraghan, “Oil, Gas Executives Find Little Left to Seek at Congressional Energy Hearing,” Denver Post, 23 May 2001.
10. We ended our time series on September 10 to avoid possible confounding
effects resulting from the terrorist attacks of September 11. Indeed, one of the advantages of our event-study methodology is that it can capture the effect of the Jeffords
switch without being tainted by the many changes in U.S. politics that followed in the
wake of September 11.
Such considerations are also related to a possible criticism of our research design,
which is that, despite unified Republican government since early 2003, Republicans
did not pass an energy bill until 2005—and, when they did, they passed a more-moderate
version than the one being considered in 2001 (Oppenheimer and Hetherington 2006).
This deviation might be construed as evidence contrary to our assumption that the
market correctly expected passage of the Republican energy bill in 2001. But changes
in U.S. politics since September 11 call into question any such inference. Considering
the seismic shifts in government priorities and public concerns since then, we do not
think it safe to assume that the course of energy policy since early 2003 constitutes an
accurate counterfactual portrayal of what would have happened in 2001 if the Jeffords
switch had not occurred.
11. CNN Financial News, “Energy Sector Analyzed,” 24 May 2001; Mark
Gangloff, CNN Money, “Jeffords’ Economic Impact,” 24 May 2001.
12. These numbers were calculated as the change from the end of trading on the
first day listed to the end of trading on the last day listed, with Price × Shares-outstanding
to indicate market capitalization.
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