Legislating Stock Prices

44 Pages Posted: 18 Mar 2012  

Lauren Cohen

Harvard Business School; National Bureau of Economic Research (NBER)

Karl B. Diether

Independent

Christopher J. Malloy

Harvard Business School; National Bureau of Economic Research (NBER)

Date Written: March 15, 2012

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 how any given piece of legislation will affect firms, or which firms it will likely affect. 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 these “interested” legislators’ behaviors captures simple information seemingly ignored by the market. Forming a long-short portfolio based on these views yields a portfolio that earns abnormal returns of over 90 basis points per month following the passage of legislation. These returns show no run-up prior to, and no announcement effect directly at, bill passage. Lastly, consistent with the legislator interest mechanism, the more concentrated the legislator interest in the industry, the larger the abnormal returns.

Keywords: Legislator voting, constituent interests, expected returns

JEL Classification: G12, G14, D72

Suggested Citation

Cohen, Lauren and Diether, Karl B. and Malloy, Christopher J., Legislating Stock Prices (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=2023536 or http://dx.doi.org/10.2139/ssrn.2023536

Lauren Cohen (Contact Author)

Harvard Business School ( email )

Rock Center 321
Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://www.people.hbs.edu/lcohen

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Karl B. Diether

Independent

No Address Available

Christopher J. Malloy

Harvard Business School ( email )

Soldiers Field Road
Baker Library 277
Boston, MA 02163
United States
617-495-4383 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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