Legislating Stock Prices

52 Pages Posted: 10 Aug 2012

See all articles by Lauren Cohen

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: August 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 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.

Suggested Citation

Cohen, Lauren and Diether, Karl B. and Malloy, Christopher J., Legislating Stock Prices (August 2012). NBER Working Paper No. w18291. Available at SSRN: https://ssrn.com/abstract=2127555

Lauren Cohen (Contact Author)

Harvard Business School ( email )

Rock Center 321
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HOME PAGE: http://www.people.hbs.edu/lcohen

National Bureau of Economic Research (NBER) ( email )

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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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