June 18, 2008
Are Event Studies About Legal Changes Limited to Litigation?
Posted by David Zaring

The event studies that I see most often track changes in stock prices given changes in other events of interest.  Are takeovers good or bad?  Let's see what happens to the stock prices of the target or acquirer upon the announcement.  And so on.

I've often thought it would be useful to get a good event study in international law - which is often thought to be ineffective.  But if stock prices jumped or fell upon the conclusion of a treaty or the announcement of an international regulatory initiative like Basel's principles yesterday or whatever, that would be evidence that international law does matter, at least to investors.

The well-known problem with this sort of thing, however, is that international legal developments are rarely surprising.  Regulations are announced, comments are sought, and then final rules are promulgated.  Treaties are ratified slowly, and what matters anyway?  The beginning of the negotiations?  The announcement of a breakthrough?  The signing ceremony?  The ratification by enough countries so that the treaty enters into force?  Ratification by the United States?  Investors will often have taken account of the impact of the regulation or treaty by the time in enters into force, making event studies of regulation (and treaties) difficult to do.

Litigation, however, is a legal event around which an event study can be constructed.  Jeffrey Lax and Matthew McCubbins did one for the FDA's tobacco regulation rules.

But even litigation can be tricky.  The WSJ Law Blog reports that Bell Canada's stock price jumped not because of a decision by the Canadian Supreme Court reviewing a decision scuttling its buyout ... but because of the oral argument on appeal.  Hope those investors are good at discerning outcomes from skeptical questions by the chief justice.

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