Implementing and Interpreting Event Studies of Regulatory Changes

Abstract

The study of the stock price reaction to an event is a standard tool in economics and finance. The spate of regulatory changes in recent years provides ample opportunity for such studies. However, event studies of regulatory changes present a number of challenges. Analysts must carefully design and interpret tests of hypotheses regarding the effects of regulatory changes because of the nature of the regulatory process and financial markets. I discuss the way to test for the impact of regulatory changes in an event study. I also comment on what event studies can and cannot tell us about the effects of regulatory changes, and on ways to more effectively implement them.