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As local and national governments worldwide continue to consider whether or not to adopt laws restricting smoking in public places, and the extent of any such restrictions, a critical issue has often been the impact of smoking bans on the local hospitality industry (Eriksen and Chaloupka, 2007).

Because of the importance of this issue, over 150 studies have examined the economic effects of smoking bans on the hospitality industry by studying such metrics as sales, employment, firm value, bankruptcy, the number of establishments, or some combination of these (Fleck and Hanssen, 2008; Scollo and Lal, 2008). With a few exceptions, these studies conclude that smoking bans have no economic effects or positive economic effects on the firms studied. However methodological shortcomings in the prior studies have been identified and the area of study has become emotionally charged (Marlow, 2008).

In this paper, I employ a method and data sample which are not subject to the primary criticisms that has been raised against prior empirical studies. I examine the stock market reaction of firms in the Indian hospitality upon the announcement that the government would introduce legislation banning smoking in public places. As I explain below, although it appears unlikely that an event study can be successfully performed to analyze many smoking bans, India provides a good opportunity to employ this method.

Because the sample of firms used are relatively homogenous in terms of their operating characteristics and the legal restrictions they faced, the concern with aggregating heterogeneous firms, often present in prior studies, is not a concern for this sample of firms. An event study is also a well established empirical method that overcomes previous concerns about the use of sales data as it employs stock price data and measures impact on a well defined event date. I find negative abnormal stock market returns to all portfolios of hospitality firms