Triggering the 1987 Stock-Market Crash: Antitakeover Provisions in the Proposed House Ways and Means Tax Bill?
Triggering the 1987 Stock-Market Crash: Antitakeover Provisions in the Proposed House Ways and Means Tax Bill? by Mark L. Mitchell* and Jeffry M. Netter** During the three trading days immediately prior to the October 19, 1987 stock market crash, U.S. stock prices declined by a greater percentage than during any one, two or three-day period since 1940. Contemporaneously, the House Ways and Means Committee introduced a tax bill that would have limited the interest deductions associated with debt used to finance corporate takeovers, going-private transactions and recapitalizations. We provide evidence suggesting that the stock market, especially takeover stocks and risk arbitragers, reacted negatively to news of the bill’s progress. An analysis of international markets reveal the U.S. decline was unmatched by the rest of the world during this period. A positive response by the stock market, especially takeover stocks and risk arbitragers, to later news of fading Congressional support for the bill provides additional evidence that the bill had a significant impact. The overall evidence suggests that the antitakeover restrictions in the proposed House bill were a fundamental economic event contributing to the greater than ten percent market decline during October 14-16, which arguably triggered the October 19 crash. * Research Scholar, U.S. Securities and Exchange Commission 450 5th St. N.W., Washington, D.C 20549, (202) 272-7115. ** Assistant Professor of Economics, University of Georgia, Athens, Georgia 30602, (404) 542-3673 and former Research Scholar, U.S. Securities and Exchange Commission. We are grateful to Alden Adkins, Brandon Becker, David Blackwell, Bernard Black, Richard Doernberg, Dean Furbush, Larry Harris, Joe Grundfest, Michael Jensen, David Malmquist, Wayne Marr, Howard Marvel, Lisa Meulbroek, Harold Mulherin, Richard Roll, Richard Ruback, and especially Ken Lehn and Annette Poulsen for their many helpful comments and suggestions.
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