Reaction and Anticipation of Corporate-Related Supreme Court of the United States (SCOTUS) Decisions by the Stock and Option Markets

Abstract

This paper investigates stock and option market reactions to judicial events in the United States Supreme Court (SCOTUS) relating to cases where at least one party involved is a public firm. Using a comprehensive dataset of more than 500 SCOTUS cases from 1948 to 2018, we find that the stock market is unable to anticipate SCOTUS’s actions and reacts significantly to both the grant of certiorari and to the announcement of the final decision. In particular, there is a significant negative stock market reaction to the grant of certiorari for the petitioner and respondent, portending general higher uncertainty ahead, and a positive (negative) stock market reaction to the final decisions for winning (losing) firms. We also find persuasive evidence that the option market can anticipate the final decision as early as the date certiorari is granted, reinforcing the theory that smart money comes early to the option market.

Keywords: abnormal stock returns; implied volatility spread; Supreme Court; petitioner; respondent; writ of certiorari

JEL Classification: K22, K40, D53