Marijuana Legalization and Firms' Cost of Equity

Abstract

After medical marijuana legalization (MML) by U.S. states, firms’ cost of equity (COE) decreases, especially for those with more growth opportunities, higher productivity, or a more skilled workforce. This policy change also reduces firm risk and leads to an increase in labor supply through increased labor force participation, employment, hours worked, and net migration. Further, home prices rise after MML, reflecting increased local housing demand due to a growing supply of workers. These findings align with theoretical models that link asset prices to labor markets and suggest that MML can lower firms COE by mitigating labor search frictions.

Keywords: Marijuana Legalization, Cost of Equity, Labor Search Frictions, Adjustment Cost Shocks, Labor Supply, Worker Skill

JEL Classification: G12, G30, J21, I18