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Publications
Publications
  • December 2013
  • Article
  • Journal of Financial Economics

Legislating Stock Prices

By: Lauren Cohen, Karl Diether and Christopher Malloy
  • Format:Print
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Abstract

We demonstrate that legislation has a simple, yet previously undetected impact on stock prices. Exploiting the voting record of legislators whose constituents are the affected industries, we show that the votes of these "interested" legislators capture 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. Industries that we classify as beneficiaries of legislation experience significantly more positive earnings surprises and positive analyst revisions in the months following passage of the bill, as well as significantly higher future sales and profitability. We show that the more complex the legislation, the more difficulty the market has in assessing the impact of these bills; further, the more concentrated the legislator's interest in the industry, the more informative are her votes for future returns.

Keywords

Legislator Incentives; Voting; Return Predictability; Lobbying; Motivation and Incentives; Government Legislation; Stocks

Citation

Cohen, Lauren, Karl Diether, and Christopher Malloy. "Legislating Stock Prices." Journal of Financial Economics 110, no. 3 (December 2013): 574–595. (Winner of Fama-DFA Prize for the Best Paper Published in the Journal of Financial Economics in Asset Pricing (Distinguished Paper) 2013.)
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About The Authors

Lauren H. Cohen

Finance
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Christopher J. Malloy

Finance
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More from the Authors

    • March 2021
    • Faculty Research

    Litigation Finance 2.0: LexShares

    By: Lauren Cohen, Spencer C. N. Hagist and Yago Zavalia Gahan
    • February 2021
    • Faculty Research

    Lidya: Bringing Nigerian FinTech Innovation to Global Small and Medium Enterprises

    By: Lauren Cohen and Spencer C.N. Hagist
    • February 2021 (Revised March 2021)
    • Faculty Research

    Equity Bank: Challenging a Giant

    By: Lauren Cohen, Michael Chitavi and Spencer C. N. Hagist
More from the Authors
  • Litigation Finance 2.0: LexShares By: Lauren Cohen, Spencer C. N. Hagist and Yago Zavalia Gahan
  • Lidya: Bringing Nigerian FinTech Innovation to Global Small and Medium Enterprises By: Lauren Cohen and Spencer C.N. Hagist
  • Equity Bank: Challenging a Giant By: Lauren Cohen, Michael Chitavi and Spencer C. N. Hagist
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