Legislating Stock Prices

Lauren Cohen, Karl B. Diether and Christopher Malloy ()

No 18291, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper we demonstrate that legislation has a simple, yet previously undetected impact on firm stock prices. While it is understood that the government and firms have an important relationship, it remains difficult to determine which firms any given piece of legislation will affect, and how it will affect them. By observing the actions of legislators whose constituents are the affected firms, we can gather insights into the likely impact of government legislation on firms. Specifically, focusing attention on "interested" legislators' behavior captures important information seemingly ignored by the market. A long-short portfolio based on these legislators' views earns abnormal returns of over 90 basis points per month following the passage of legislation. Further, the more complex the legislation, the more difficulty the market has in assessing the impact of these bills. Consistent with the legislator incentive mechanism, the more concentrated the legislator's interest in the industry, the more informative are her votes for future returns.

JEL-codes: G02 G12 G14 (search for similar items in EconPapers)
Date: 2012-08
New Economics Papers: this item is included in nep-fmk
Note: AP LE POL
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Citations: View citations in EconPapers (1)

Published as “Legislating Stock Prices” (with Karl Diether and Christopher Malloy), 2013. Journal of Financial Economics 110, 574-595.

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