Businesses Are More Profitable And Innovative In States With Legal Marijuana, Study Finds
States have been experimenting with various forms of marijuana legalization for years and, according to new research, business is better where cannabis is legal.
To investigate the impact legalization has on the economy, researchers at the University of Iowa analyzed 9,810 corporations between 1991 and 2017, finding “a multitude of positive effects” after a state enacts medical marijuana laws.
“Firms headquartered in marijuana-legalizing states receive higher market valuations, earn higher abnormal stock returns, improve employee productivity, and increase innovation,” the authors said.
The study, which was reviewed by Marijuana Moment but has yet to be published, found that having cannabis laws on the books can unleash the previously untapped potential of employees and helps companies attract new talent.
Corporations “become more productive and hire more productive human capital from out of state after the passage of the law,” the authors wrote.
They also report that “firms earn higher net income per employee” after a medical cannabis law is passed, and “the positive impact is sustained over the next two years.”
Additionally, the study found a 4.2 percent increase in company value, which translates into an average increase of the market-value of corporations by $166 million after a medical marijuana law is enacted.
“Firms experience an increase in profitability likely due to the positive shock to the human capital post-legalization,” the study finds.
“State-level medical marijuana laws have a considerable positive impact on firms in the state, likely by having a positive impact on the human capital of firms.”
Higher profits and more productivity aren’t the only benefits a company sees after marijuana is legalized. When it comes to stock prices, companies located in states with medical cannabis fare better than those in jurisdictions where the plant is prohibited.
Additionally, the stock value of corporations in medical marijuana states increased by 4.56 percent. An “equal-weighted portfolio” composed of similar stocks located in states without a medical marijuana program showed a loss of about two percent annually.
Returns on stocks were also 4.44 percent higher per year for companies in states that have legalized.
What’s the source of such financial benefits? The authors suggested that companies will ramp up innovation after marijuana laws are passed, making the company more profitable over time, compared to their counterparts in areas that don’t permit cannabis at all.
“Our results imply that after marijuana legalization, firms not only apply for more patents and receive more citations on those patents, but also are more productive and efficient in generation innovation output from labor and [research and development] input,” the study determined.
“We also find an increase in both entrepreneurial activity and venture capital funding in states that legalize marijuana.”
Finally, the study measures the “innovation productivity” of those working, living and moving to the state, following the passage of a medical marijuana law.
“The inventors that are in the state both before and after legalization become more creative” post-legalization, the authors found.
And when it comes to attracting new talent from other states, “more inventors relocate to states after medical marijuana legalization than before passage of the law.”
The benefit is two-fold for such corporations. In addition to being “able to attract more productive inventors” in states with medical marijuana “relative to states that do not legalize,” existing employees also see an uptick in innovation after a cannabis law is passed, the study concluded.
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