Law on the Market? Abnormal Stock Returns and Supreme Court Decision-Making

25 Pages Posted: 24 Aug 2015 Last revised: 16 May 2017

Daniel Martin Katz

Illinois Tech - Chicago Kent College of Law

Michael James Bommarito II

LexPredict, LLC; Bommarito Consulting, LLC; Chicago-Kent College of Law - Illinois Institute of Technology; Michigan State College of Law

Tyler Soellinger

Michigan State University - College of Law

James Ming Chen

Michigan State University - College of Law

Date Written: May 14, 2017

Abstract

What happens when the Supreme Court of the United States decides a case impacting one or more publicly-traded firms? While many have observed anecdotal evidence linking decisions or oral arguments to abnormal stock returns, few have rigorously or systematically investigated the behavior of equities around Supreme Court actions. In this research, we present the first comprehensive, longitudinal study on the topic, spanning over 15 years and hundreds of cases and firms. Using both intra- and interday data around decisions and oral arguments, we evaluate the frequency and magnitude of statistically-significant abnormal return events after Supreme Court action. On a per-term basis, we find 5.3 cases and 7.8 stocks that exhibit abnormal returns after decision. In total, across the cases we examined, we find 79 out of the 211 cases (37%) exhibit an average abnormal return of 4.4% over a two-session window with an average |t|-statistic of 2.9. Finally, we observe that abnormal returns following Supreme Court decisions materialize over the span of hours and days, not minutes, yielding strong implications for market efficiency in this context. While we cannot causally separate substantive legal impact from mere revision of beliefs, we do find strong evidence that there is indeed a "law on the market" effect as measured by the frequency of abnormal return events, and that these abnormal returns are not immediately incorporated into prices.

Keywords: Supreme Court, securities markets, arbitrage, event study, judicial decision-making, market efficiency, abnormal returns

JEL Classification: G20, G14, G18, K10, K40

Suggested Citation

Katz, Daniel Martin and Bommarito, Michael James and Soellinger, Tyler and Chen, James Ming, Law on the Market? Abnormal Stock Returns and Supreme Court Decision-Making (May 14, 2017). Available at SSRN: https://ssrn.com/abstract=2649726 or http://dx.doi.org/10.2139/ssrn.2649726

Daniel Martin Katz (Contact Author)

Illinois Tech - Chicago Kent College of Law ( email )

565 W. Adams St.
Chicago, IL 60661-3691
United States

HOME PAGE: http://www.danielmartinkatz.com/

Michael James Bommarito II

LexPredict, LLC ( email )

MI
United States

HOME PAGE: http://lexpredict.com

Bommarito Consulting, LLC ( email )

MI 48098
United States

HOME PAGE: http://bommaritollc.com

Chicago-Kent College of Law - Illinois Institute of Technology ( email )

565 W. Adams St.
Chicago, IL 60661-3691
United States

Michigan State College of Law ( email )

318 Law College Building
East Lansing, MI 48824-1300
United States

Tyler Soellinger

Michigan State University - College of Law ( email )

318 Law College Building
East Lansing, MI 48824-1300
United States

James Ming Chen

Michigan State University - College of Law ( email )

318 Law College Building
East Lansing, MI 48824-1300
United States

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