Working Paper: NBER ID: w18291
Authors: Lauren Cohen; Karl B. Diether; Christopher Malloy
Abstract: 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.
Keywords: Legislation; Stock Prices; Firm Performance; Voting Behavior
JEL Codes: G02; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Legislation (K16) | Firm stock prices (G12) |
| Voting behavior of interested legislators (D72) | Firm stock prices (G12) |
| Voting behavior of interested legislators (D72) | Future stock returns (G17) |
| Complex legislation (K19) | Market assessment of impact (F69) |
| Lobbying efforts (D72) | Predictability of stock returns (G17) |