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;

Format: Print

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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.)

Case | HBS Case Collection | March 2018

Chaudhary Group: Rebuilding Nepal

Christopher J. Malloy, Lauren H. Cohen, Inakshi Sobti, Christopher J. Malloy, Lauren H. Cohen and Inakshi Sobti

After the 2015 Nepal earthquake, the Chaudhary Group, a billion-dollar conglomerate in Nepal decides to play a pivotal role in re-building the country. The Group's philanthropic arm (Chaudhary Foundation) works with stakeholders and develops a blue print for short- and long-term relief measures. The management needs to address several questions as they navigate the foundation's course. What element of relief work should the foundation focus on? Should they go beyond addressing the immediate need for shelters and adopt a more holistic development plan? How should they acquire technical expertise and organize themselves to successfully execute this effort? The case focuses on how businesses can drive entrepreneurship and disaster management efforts and be agents for social change in the emerging markets grappling with institutional voids. How should they work with the government in this endeavor? How do they ensure an alignment of these efforts to the group and foundation's long-term focus areas and objectives?

Keywords: Leadership; Family Business; Decision Choices and Conditions; Developing Countries and Economies; Social Entrepreneurship; Values and Beliefs; Venture Capital; Microfinance; Geographic Location; Collaborative Innovation and Invention; Management; Crisis Management; Management Teams; Resource Allocation; Business and Community Relations; Business and Government Relations; Natural Disasters; Social and Collaborative Networks; Social Issues; Business Strategy; Consumer Products Industry; Banking Industry; Auto Industry; Real Estate Industry; Travel Industry; Nepal;

Citation:

Malloy, Christopher J., Lauren H. Cohen, and Inakshi Sobti. "Chaudhary Group: Rebuilding Nepal." Harvard Business School Case 218-100, March 2018. View Details

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This B case is a supplement to the Chaudhary Group: Rebuilding Nepal case. Having successfully spearheaded relief work in the aftermath of the Nepal earthquake the Chaudhary Foundation envisions creating a more comprehensive and sustainable development model. They are keen to build a model village that integrates components of shelter, education, skill development and livelihood creation and affords residents a basic standard of living. What should the blueprint of this sustainable ecosystem include? Who are the stakeholders they should collaborate with on this effort? Can this model be replicated at scale across the country?

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Legislating Stock Prices

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