Mind the Contagion, Your Honour

Although court judgments on economic issues are frequent, their economic impact remains understudied. Unlike institutional reforms and laws studied extensively by law and finance literature, they are not publicly debated, not passed by elected legislators, and do not always take full economic implications into account. Studying an unexpected verdict of the Supreme Court of India that retrospectively cancelled allocation of coal blocks to firms, we find evidence of contagion through banks associated with affected firms. Such banks reduce lending to their borrowers who, subsequently, contract operations and investments, and default more. Night lights activity suggests broad-based economic slowdown after the judgment.