Legislating Stock Prices / Lauren Cohen, Karl B. Diether, Christopher Malloy.

Format:

Book

Author/Creator:

Cohen, Lauren.

Contributor:

National Bureau of Economic Research.

Diether, Karl B.

Malloy, Christopher.

Series:

Working Paper Series (National Bureau of Economic Research) no. w18291.

NBER working paper series no. w18291

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2012.

Summary:

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.

Notes:

Print version record

August 2012.