Law on the Market? Abnormal Stock Returns and Supreme Court Decision-Making

TL;DR

This study systematically examines how Supreme Court decisions influence stock prices over 15 years, revealing significant abnormal returns that materialize hours to days after rulings, indicating a measurable 'law on the market' effect.

Contribution

First comprehensive longitudinal analysis of stock market reactions to Supreme Court decisions, quantifying abnormal returns and timing, with implications for market efficiency.

Findings

37% of cases show abnormal returns averaging 4.4%

Abnormal returns occur over hours and days, not minutes

Strong evidence of a 'law on the market' effect

Abstract

What happens when the Supreme Court of the United States decides a case impacting one or more publicly-traded firms? While many have observed anecdotal evidence linking decisions or oral arguments to abnormal stock returns, few have rigorously or systematically investigated the behavior of equities around Supreme Court actions. In this research, we present the first comprehensive, longitudinal study on the topic, spanning over 15 years and hundreds of cases and firms. Using both intra- and interday data around decisions and oral arguments, we evaluate the frequency and magnitude of statistically-significant abnormal return events after Supreme Court action. On a per-term basis, we find 5.3 cases and 7.8 stocks that exhibit abnormal returns after decision. In total, across the cases we examined, we find 79 out of the 211 cases (37%) exhibit an average abnormal return of 4.4% over a two-session window with an average $|t|$-statistic of 2.9. Finally, we observe that abnormal returns following Supreme Court decisions materialize over the span of hours and days, not minutes, yielding strong implications for market efficiency in this context. While we cannot causally separate substantive legal impact from mere revision of beliefs, we do find strong evidence that there is indeed a "law on the market" effect as measured by the frequency of abnormal return events, and that these abnormal returns are not immediately incorporated into prices.