Capital Market Reactions to Congressional Events Leading to the Passage of the American Taxpayer Relief Act of 2012

Abstract

The American Taxpayer Relief Act (ATRA) was signed into law after the considerable congressional debate on January 2, 2013 to avert the fiscal cliff. We examine stock returns around major political and congressional events leading to the passage of the ATRA, which resulted in a partial resolution of the 2013 fiscal cliff and the government shutdown in 2013. We identify 18 congressional events associated with the fiscal cliff, the ATRA, and the partial government shutdown from November 7, 2012 to October 21, 2013. We find a positive stock market reaction on the days representing favorable steps toward averting the fiscal cliff, which threatened significant tax increases and spending cuts in the United States. We observe the opposite on days representing unfavorable initiatives that would have pushed the country over the fiscal cliff. We also find that some firm attributes and corporate governance measures are associated with the observed market reactions. Our results have policy, practical, and educational implications.