Does the stock market anticipate events and supreme court decisions in corporate cases?

Abstract

This paper investigates stock market reactions to judicial events in the United States Supreme Court (SCOTUS) involving at least one public firm. Using a comprehensive dataset of >500 SCOTUS cases from 1948 to 2018, we find that the stock market reacts significantly to both the grant of certiorari and the announcement of the final decision. In particular, the stock market reaction to the petitioner and respondent being granted certiorari is significantly negative, portending general higher uncertainty ahead. Furthermore, the stock market reaction to the final decisions for winning (losing) firms is positive (negative). In addition, we find that case characteristics, such as parties involved and the type of legal issue, explain some of the cross-sectional variations in the stock returns across cases. Our tests also show that there is no prior information leakage and no stock price drift following the events. JEL Classification: K22; K40; D53