Legislating Stock Prices

Lauren  Cohen; Karl  Diether; Christopher  Malloy

Article | Journal of Financial Economics | December 2013

Legislating Stock Prices

by Lauren Cohen, Karl Diether and Christopher Malloy

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;

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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.)

Article | Management Science | December 2019

Patent Trolls: Evidence from Targeted Firms

Lauren Cohen, Umit Gurun and Scott Duke Kominers

We provide the first large-sample evidence on the behavior and impact of nonpracticing entities (NPEs) in the intellectual-property space. We find that, on average, NPEs appear to behave as opportunistic “patent trolls.” NPEs sue cash-rich firms and target cash in business segments unrelated to alleged infringement at essentially the same frequency as they target cash in segments related to alleged infringement. By contrast, cash is neither a key driver of intellectual-property lawsuits by practicing entities (e.g., IBM and Intel) nor of any other type of litigation against firms. We find further suggestive evidence of NPE opportunism: targeting of firms that have reduced ability to defend themselves, repeated assertions of lower-quality patents, increased assertion activity nearing patent expiration, and forum shopping. We find, moreover, that NPE litigation has a real negative impact on innovation at targeted firms: firms substantially reduce their innovative activity after settling with NPEs (or losing to them in court). Meanwhile, we neither find any markers of significant NPE pass-through to end innovators nor of a positive impact of NPEs on innovation in the industries in which they are most prevalent.

Keywords: Patent trolls; patents; innovation; Patents; Lawsuits and Litigation; Ethics; Innovation and Invention;

Citation:

Cohen, Lauren, Umit Gurun, and Scott Duke Kominers. "Patent Trolls: Evidence from Targeted Firms." Management Science 65, no. 12 (December 2019): 5461–5486. (Cited in the United States Federal Trade Commission Report on Patent Assertion Entities, 2016.) View Details

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We provide evidence that mutual fund managers misclassify their holdings and that these misclassifications have a real and significant impact on investor capital flows. In particular, we provide the first systematic study of bond funds’ reported asset profiles to Morningstar against their actual portfolios. Many funds report more investment grade assets than are actually held in their portfolios, making these funds appear significantly less risky. This results in pervasive misclassifications across the universe of U.S. fixed income mutual funds by Morningstar, who relies on these reported holdings. The problem is widespread—resulting in about 30% of funds being misclassified with safer profiles, when compared against their actual, publicly reported holdings. “Misclassified funds”—i.e., those that hold risky bonds but claim to hold safer bonds—outperform the actual low-risk funds in their peer groups. “Misclassified funds,” therefore, receive higher Morningstar Ratings (significantly more Morningstar Stars) and higher investor flows due to this perceived outperformance. However, when we correctly classify them based on their actual risk, these funds are mediocre performers. Misreporting is stronger following several quarters of large negative returns.

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Legislating Stock Prices

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