Law On The Market? Evaluating The Securities Market Impact Of Supreme Court Decisions

H/T Saumya Vaishampayan

Daniel Martin Katz

Illinois Tech – Chicago Kent College of Law

Michael James Bommarito II

Bommarito Consulting, LLC

Tyler Soellinger

Michigan State University – College of Law

James Ming Chen

Michigan State University – College of Law

August 24, 2015

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.

Law On The Market? Evaluating The Securities Market Impact Of Supreme Court Decisions – Introduction

On June 13th, 2013, the United States Supreme Court delivered its opinion in the highly anticipated bio-patent case of Association for Molecular Pathology v. Myriad Genetics Inc., 133 S. Ct. 2107 (2013). Through this case, the Court considered the important question of whether human genes could be subjected to patent claims. The party to the litigation, Myriad Genetics, was sued over its patent claims relating to two types of biological material | BRCA1 and BRCA2, whose mutations are linked to increased risk for breast and ovarian cancer. Under the cover of its patent claim, Myriad Genetics had sought to be the exclusive provider of “BRAC analysis” and “BART analysis” tests used to screen patients for cancer.

Securities Market  Supreme Court

The Court’s ultimate decision was seen as a compromise that held that DNA sequences fall outside the definition of patentable subject matter under 35 U.S.C. x101, but cDNA (complementary DNA) sequences, which do not occur in nature absent human intervention, may indeed be patented. Ultimately, the Court’s decision was significant not only for its contribution to overall patent law doctrine but also to the value of Myriad as a company.

As displayed in Figure 1, the Court’s compromise decision initially confused the equity market. Fueled in part by media reports, would-be arbitrageurs interpreted the Court’s decision as positive to Myriad in the initial hours of trading. However, this view was ultimately displaced as more careful reading and subsequent understanding revealed that the decision was highly unfavorable to Myriad’s business interests. As a result, the stock began to trade down in the second half of the session. Media coverage following the initial trading day called it a “wild ride” and a “market whipsaw.”

As the dust settled, the Court’s decision was indeed detrimental to Myriad’s long-term financial value. Even after controlling for overall market trends, Myriad’s stock lost in excess of 20% of value over the two-day trading window. Attendant to this change in price, there was also a signifificant increase in volume as traders sought to shift their positions in light the Court’s decision. Specifically, on the date of decision, there was roughly a thirteen-fold increase in trading volume of the stock. The day thereafter witnessed an eighteen-fold increase in trading volume.

Do judicial decisions affect financial markets in discernible manner? This question has been raised by commentators, but has been evaluated by very few, let alone in a financially rigorous manner. In Myriad, the case is relatively clear. However, Myriad is in many ways a unique case. It is not clear whether market behavior in response to the Court’s decision is a rare or common event. What is the frequency and extent of movement attached to the wider set of events? While scholars have studied the securities market impacts of individual cases or have engaged in limited explorations into particular substantive areas of law, to date, there has been no systematic, long-term analysis of an entire court such as the Supreme Court of the United States.

In this paper, we consider the frequency and extent to which the decisions of the Supreme Court affect equity markets. We comprehensively review every decision of the Supreme Court of the United States from the 1999-2000 term through the conclusion of the 2013-2014 term and identify the subset of case space where there is any plausible belief that the Court’s decision could have an impact on one or more publicly traded companies. The Supreme Court considers a wide range of questions that are unlikely to affect the securities market. In addition, there are a number of decisions of the high court that do impact markets, but do so on time scales that prevent conclusive identification using available data and statistical methods. As a result, the analysis presented herein should be considered a conservative or lower bound estimate of the frequency and extent of impacts owing from the Court’s decisions.

Using our expert-coded subset of cases and applying event study methods developed in finance, we conduct abnormal returns analysis using intraday data at five minute intervals over a multiday event window (the day of decision and the immediate trading day after the decision). Controlling for overall market trends, we identify over seventy five instances (approximately five cases per year) where the share price of one or more publicly traded companies moved in direct response to a Supreme Court decision.

In total, over the past fifteen years, decisions of the Supreme Court of United States are collectively responsible more than 140 billion dollars of changes in wealth in the relevant equity markets. Our analysis not only contributes to the political economy of judicial decision-making, but also links to the broader research on information processing in financial markets. In that spirit, we conclude by exploring the informational efficiency of law as a market.

To our knowledge, this is the first intraday study to systemically explore the relationship between judicial decision making and equity markets. Using our event study framework, our analysis indicates that law indeed is on the market. As this is an initial inquiry into the much broader question of legal decision making in shaping the behavior of equity markets, we believe our intraday analysis can be meaningfully extended to several other domains of

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