“The effect of marijuana legalization on cannabis stocks returns

Abstract

The thesis investigates the effect of the announcement of cannabis legalization for medical as well as recreational purposes on cannabis stocks returns. I do the research for legalizations for USA states and other countries over years from 2008 until 2021. Moreover, by introducing dummy variables into the model, I check if the fact of legalization being announced during a hot legalization year and if it was legalized for recreational use influence the magnitude of the effect. In order to check it, I perform an event study by calculating CAAR for every legalization date for the event window from three days before until three days after the legalization. The results are that the legalization of cannabis decreases CAARs in the selected period on average by 0,7% at a 95 % confidence level and that dummy variables proposed by me do not explain this effect or their influence is negligibly minor. The study is important from the scientific perspective as it enriches the literature about cannabis stocks which is narrow but also from the real perspective as it provides a conclusion that investors should not invest in cannabis stocks in the closest days to the legalization as it does not lead to earning abnormal returns.