Legislating Stock Prices
44 Pages Posted: 18 Mar 2012
Date Written: March 15, 2012
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: Suggested Citation