Background In 2010, the US Food and Drug Administration (FDA) proposed requiring tobacco companies to add graphic warning labels (GWLs) to cigarette packs. GWLs are large prominently placed warnings that use both text and photographic images to depict health risks of smoking. The companies challenged FDA's authority on First Amendment grounds; the courts accepted that FDA could compel companies to add GWLs, but argued that FDA had not established that GWLs would significantly reduce smoking.

Objective This paper adds new evidence on the question of whether GWLs would have reduced cigarette demand, by examining whether tobacco companies’ share prices fell unusually after news indicating a higher likelihood of having GWLs, and rose on the opposite news. Such findings would be expected if investors viewed GWLs as likely to reduce cigarette demand.

Methods An event-study approach is used to determine whether the stock prices of US tobacco companies rose or fell unusually after news events in the period when GWLs were proposed, finalised, challenged and withdrawn.

Findings Tobacco companies’ stock prices indeed realised significant abnormal returns after GWL news, consistent with expected negative effects on cigarette demand. Our estimates suggest investors expected GWLs to reduce the number of smokers by an extra 2.4–6.9 million in the 10 years after the rule took effect.

Conclusions These findings support the view that the GWLs proposed by FDA would have curbed cigarette consumption in the USA in an appreciable way.