Strategic Responses to Regulatory Threat in the Credit Card Market

Abstract

Abstract Models of endogenous regulatory threat suggest that firms may cut prices in order to ease a threat of regulation. I test the implications of these models using stock market data from an episode of regulatory threat in the credit card market. The data show that the initial threat led to negative abnormal returns for a portfolio of credit card issuers. Consistent with the regulatory threat hypothesis, price cuts announced after the threat led to abnormal returns that are significantly more positive than those following similar cuts outside the period of regulatory threat. This pattern exists not only for those issuers announcing cuts but also for their rivals, which suggests that the cuts reduced an industry‐wide threat of regulation. Factors that proxy for issuers’ exposure to and influence on the probability of regulation affect the size of these returns, which provides corroborative evidence in favor of the regulatory threat hypothesis.