It only makes sense that notable legal decisions made by the Supreme Court would have a significant impact on U.S. financial markets, but the extent of the impact has not been accurately quantified until recently.
A team of Midwestern academics led by Daniel Martin Katz used intraday data and a multiday event window to undertake a large-scale event study to determine the existence, frequency
and magnitude of equity market impacts due to Supreme Court decisions. The results of the study showed that “law on the market” events related to Supreme Court decisions do occur on a reasonably regular basis.
The new research was published on August 25th, 2015 in the journal SSRN.
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Supreme Court cases impact public firms to the tune of $140 billion from 1999 to 2013
One of the primary results of the new study by Katz and colleagues was that market-impacting “law on the market” events are actually relatively common.
In summarizing the results, the authors note: “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 fourteen 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.”
Study results suggest “Supreme Court arbitrage” could be a profitable strategy
Interestingly, it turns out that the equity markets are a bit slow in digesting the import of major Supreme Court decisions, so there is an opportunity to make profits if investors can act quickly. Katz et al point out: “Relatively speaking, LOTM events have historically exhibited slow rates of information incorporation for effected securities. This implies a market ripe for arbitrage where an event-based trading strategy could be successful.”
Myriad Genetics 2013 case
Back in June of 2013, the United States Supreme Court delivered its opinion in the case of Association for Molecular Pathology v. Myriad Genetics Inc., 133 S. Ct. 2107. The Court considered the question of whether human genes could be patented. 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 connected to a higher risk for breast and ovarian cancer. With 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.
SCOTUS, however, came to a compromise decision on the case. As can be seen in Figure 1, the compromise decision initially confused equity market traders. Based on inaccurate media reports, arbitrageurs interpreted the decision as positive for Myriad for the first couple of hours. This perspective was ultimately displaced as a more thorough understanding revealed that the decision was really quite unfavorable for Myriad. Not surprisingly, the stock began to trade down in the last few hours of trading.
It turned out that the Court’s decision was clearly a negative for Myriad’s long-term financial value. Even when compensating for overall market trends, the biotech’s shares fell over 20% in just two days. There was also a huge spike in volume as traders sought to buy or sell shares following the Court’s decision. Of note, the trading volume of Myriad shares was 13 times higher than average the first day and an 1800% increase in trading volume on the second day.
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