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Health and safety regulations and stock returns: evidence from the 1974 Swedish legislative lottery

Published online by Cambridge University Press:  06 September 2022

Linus Siming
Linus Siming*
Affiliation:
Free University of Bozen-Bolzano
*
Linus Siming, Free University of Bozen-Bolzano, Faculty of Economics and Management, piazza Università 1, Italy – 39100, Bolzano; email: perlinus.siming@unibz.it.
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Abstract

This article provides causal evidence on a long-standing controversy in the finance and labour literature, namely, whether better health and safety in the working environment is in the best interests of firm owners. While, on the one hand, an influential strand of the literature argues that improvements in workers’ health and safety provision can increase costs and harm the market value of equity, another well-consolidated strand of the literature argues that such improvements can reduce costs and create shareholder value. It is empirically challenging to study the relation between the work environment and equity value due to their endogenous relation. To overcome this challenge, I utilize a historic natural experiment that uniquely isolates the effects of mandated investments in health and safety provision on firm market value: on 27 March 1974, the Swedish hung parliament drew a lottery ticket to decide on a legislative proposal that mandated companies to improve their employees’ work environment. The lottery resulted in the approval of the proposal. I find that this outcome led to an immediate and sizable decrease in the market value of Swedish companies that persisted for several days.

Keywords

natural experimentLottery Parliamenthealth and safetystock returns

JEL classification

J28: Safety • Job Satisfaction • Related Public Policy G14: Information and Market Efficiency • Event Studies • Insider Trading K32: Energy, Environmental, Health, and Safety Law
Type
Article
Information
Financial History Review , Volume 29 , Issue 2 , August 2022 , pp. 198 - 218
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Copyright
Copyright © The Author, 2022. Published by Cambridge University Press on behalf of the European Association for Banking and Financial History

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Footnotes

I thank the journal Editor and two anonymous referees for their helpful suggestions. An early version of this article titled ‘Political lottery draws and stock market returns’ was presented at an informal CEPR-ESSFM seminar in Gerzensee. I thank the seminar participants and especially Sumit Agarwal and Oğuzhan Özbaş for helpful comments. Other useful comments on the earlier draft came from seminar and conference participants at the Norwegian School of Economics, the European Association of Law and Economics in Vienna, and the Swiss Society for Financial Market Research in Zurich. Ajay Bidyarthy, Mani Vidyarthy and Premchandra Pappu provided excellent research assistance. This study is funded by a 2020 Start-up Grant from the Free University of Bozen-Bolzano.

References

Sources

Swedish Parliament: Protocol 1974:18, Protocol 1974:49, Parliamentary Motion 1974:697, Parliamentary Motion 1974:700.Google Scholar

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