Do Financial Markets Anticipate Corporate-Related Decisions of the United States Supreme Court?

Abstract

This paper investigates stock and option market reactions to events in the United States Supreme Court (SC) relating to cases where at least one party involved is a public firm. Typically, cases that reach the SC level would have passed through multiple lower courts. Consequently, much of the information content of these cases would be publicly known. If the financial market had perfectly anticipated that the SC would grant the writ of certiorari (a rare event of accepting a case for review), the tone of the subsequent legal arguments, and the final decision, then there should be no reaction to any of these events, as and when they unfold. Using a comprehensive dataset of more than 500 SC cases from 1948 to 2018, we find that the stock market reacts to both the grant of certiorari and to the announcement of the final decision, suggesting that the stock market could not anticipate the SC actions. We also find that case-specific characteristics, such as parties involved, the type of legal issue, and press coverage explain some of the cross-sectional variations in the stock returns across cases. Our tests also indicate that there is no information leakage prior to the events, and no stock price drift after the events. We also find some evidence that the option market anticipates the final decision as early as the date certiorari is granted, reinforcing the theory that smart money comes early to the option market.