Government Shutdown: A test of Market Efficiency

Document Type

Article

Publication Date

5-2015

Abstract

How does the market react to a government shutdown? Can investors earn above normal returns by acting on this type of information? How efficient is the market in reacting to the announcement of this type of event? This event study tests market efficiency theory by analyzing the impact of two recent US Government shutdowns on the risk adjusted stock price returns of a sample of 50 firms. This study used the standard risk adjusted event study methodology found in the finance literature. Evidence confirms the significant and consistent negative reaction of the risk adjusted returns for the two 50 firm samples of government contracting firms up to 30 days before and after the announcements of the 1995 and 2013 government shutdown. Evidence here documents the tremendous loss of market capital in reaction to a failure of the Federal Government policy makers to compromise and produce a timely operating budget.

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