ABSTRACT: Do judicial decisions affect the securities markets in discernible and perhaps predictable ways? In other words, is there “law on the market” (LOTM)? This is a question that has been raised by commentators, but answered by very few in a systematic and financially rigorous manner. Using intraday data and a multiday event window, this large scale event study seeks to determine the existence, frequency and magnitude of equity market impacts flowing from Supreme Court decisions.
We demonstrate that, while certainly not present in every case, “law on the market” events are fairly common. Across all cases decided by the Supreme Court of the United States between the 1999-2013 terms, we identify 79 cases where the share price of one or more publicly traded company moved in direct response to a Supreme Court decision. In the aggregate, over fifteen years, Supreme Court decisions were responsible for more than 140 billion dollars in absolute changes in wealth. Our analysis not only contributes to our understanding of the political economy of judicial decision making, but also links to the broader set of research exploring the performance in financial markets using event study methods.
We conclude by exploring the informational efficiency of law as a market by highlighting the speed at which information from Supreme Court decisions is assimilated by the market. Relatively speaking, LOTM events have historically exhibited slow rates of information incorporation for affected securities. This implies a market ripe for arbitrage where an event-based trading strategy could be successful.
Available on SSRN and arXiv
This upcoming week and next week I have the pleasure of teaching “Complex Systems Models in the Social Sciences” here at the University of Michigan ICPSR Summer Program in Quantitative Methods. The field of complex systems is very diverse and it is difficult to do complete justice to the range of scholarship conducted under this umbrella in a short survey course. However, we strive to cover the canonical topics such as computational game theory and computational modeling, network science, natural language processing, randomness vs. determinism, diffusion, cascades, emergence, empirical approaches to study complexity (including measurement), social epidemiology, non-linear dynamics, etc. Click here or on the image above to access my course materials!
As a member of the local organizing committee, I just wanted to mention that today is the final day for priority registration for the International Conference on Artificial Intelligence & Law in San Diego.