Suslava Co-authors Study Finding Stock Price Effect of Supreme Court Decisions

Last week, the U.S. Supreme Court heard a case debating whether it's legal to restrict content moderation on social media platforms like Facebook, YouTube and X. Those companies should anticipate a stock market price reaction when the Court renders its decision according to a new study, co-authored by a Bucknell University professor, which calculated the historical impact of Supreme Court (SCOTUS) decisions on the stock prices of publicly traded firms named in those cases.

Freeman College of Management Professor Kate Suslava, joined accounting professors Suresh Govindaraj, Rutgers University, and Yehuda Davis, Yeshiva University, on the research, which analyzed more than 500 Supreme Court decisions and related stock prices from publicly traded firms named in those cases between 1948 and 2018. They found that the stock price of companies that experienced positive SCOTUS opinions increased by .6% over the market average that day, while prices fell by .4% more relative to the market average among companies involved with negative decisions.

The paper has been published online and will be featured in the May issue of the Global Finance Journal.

"The stock market is the perfect setting for reaction to these Supreme Court decisions because investors vote with their wallets, so you know, for sure, how people react. We found that the positive decision had a slightly stronger influence on stock prices," Suslava says.

While the stock price increase or decrease may be expected given the decision, Suslava says any investor reaction is a bit surprising given the public availability of details involving Supreme Court cases.

"By the time they get to the Supreme Court, these cases go through many lower courts. And all the information that's in the case is available to the public — so you can read about the cases before the Supreme Court's decision," she says. "So if the stock market is efficient, it should already incorporate it [the case] into stock prices. The surprising thing is that even though we have all of these investors who know a lot about the case and have a lot of information on it, they still can't predict what the Supreme Court will decide. That's why on the date of the decision, there's that reaction."

The study also found an even greater negative stock market reaction when the Supreme Court announced its decision to review the case, resulting in a stock price drop of .7% more, on average, relative to the market average that day.

"This suggests that the stock market was caught off guard by this event and that the market views litigation as bad news and increased uncertainty for all corporate parties involved," Suslava says. "Our finding of a negative market reaction is especially surprising for the petitioners, who were appealing the case to SCOTUS and now have a rare chance to win it."

The researchers attribute the negative market reaction primarily to civil rights cases (e.g., employee disability or discrimination cases) and cases where the opposing party is the government. They wrote that "many of these civil rights cases have long-term ramifications for both the petitioner and the respondent, and a great deal of uncertainty about any final resolution often exists, resulting in lower stock prices for both parties."

In conducting their analysis, the researchers made great use of the Supreme Court Database, which provided a dataset of Supreme Court cases in a computer-readable format.

"That was important because if you want to connect anything to the stock market, you need to have it in some kind of database," Suslava says. "The Database was created by a group of researchers who actually have a legal background, and they went through cases and collected a lot of information about each case. They classified each case in a category, based on what was being discussed in the case. We only wanted to focus on cases involving publicly traded companies because that’s what we have pricing data for."

In a follow-up project, the research team plans to take their analysis into the options market space to see if "smart money" can actually predict SCOTUS decisions.