The impact of the Food Safety and Modernization Act on firm value

Abstract

Purpose – The purpose of this paper is to determine the impact of the passage and signing of P.L. 111-353, the Food Safety Modernization Act (FSMA), on the market value of agribusiness firms. Design/methodology/approach – The authors conduct an event study of the shareholder value effects of FSMA. The short-window analyses estimate the three-, five-, and seven-day market responses to three key event dates: passage by the House, passage by the Senate, and the signing of FSMA by President Obama. The long-window analyses examine a time period that encompasses the three informational events, as well as the 30 months after the signing of FSMA. To control for the effects of market-wide fluctuations, the authors use two alternative models of the returns generating process to calculate abnormal returns, the Capital Asset Pricing Model (CAPM) and the Fama-French three-factor model. Findings – The short-window analyses show no evidence of a significant reaction to the passage of FSMA by the House or the Senate, but evidence of a significant negative reaction to the signing of FSMA by President Obama. The long window results which span the of passage by House, passage by the Senate and signing by the President indicate a decline in the average market value of agribusiness firms on the order of – 10 percent over the period. Additionally, the authors find some evidence that this effect is not evenly spread out across different types of agribusiness firms (wholesale, grocery, and processing). Originality/value – The study is the first to examine the impact of P.L.111-353 on the market value of agribusiness firms.