Too high to get it right: The effect of cannabis legalization on the performance of cannabis-related stocks

Abstract

This paper analyzes the historical stock returns of 10 medicinal cannabis companies for the period between 2015 and 2020, when the legalization of recreational cannabis was debated in Canada. The results of our analysis indicate that the industry was responsive to the announcements of regulatory change that led towards legalization. Furthermore, we compare the performance of cannabis companies to that of similar businesses. The results of the comparative analysis indicate that the performance of the matched pairs is largely correlated over time. Additionally, the pre-legalization performance of cannabis companies was better than their post-legalization performance. Given that cannabis companies did not outperform their matched pair, we can confirm that legalization did not have a significantly positive effect on the industry. We can also infer that, from a stock market perspective, the legalization of recreational cannabis has been unsuccessful thus far.