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The impact of regulation on risk and return

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  • Koziol, Christian
  • Kuhn, Simon

Abstract

In this paper, we analyze the impact of regulation of firms on their stock performance. Based on the notion that regulation protects existing firms from new market entries, we firstly outline a transmission channel which leads to higher-than-expected stock returns and lower volatility as long as a firm stays regulated. However, these benefits come at the cost of substantial performance losses and an increasing volatility in case the firm gets deregulated. Thus, the superior performance in terms of return and risk before a potential deregulation can be seen as a premium for the deregulation risk. Based on a new dataset from QuantGov which quantifies industry-specific regulation in the US, we present empirical evidence for the outlined effects during an observation period from 2000 to 2020; i.e., regulation increases return and reduces risk, but deregulation imposes severe losses.

Suggested Citation

  • Koziol, Christian & Kuhn, Simon, 2023. "The impact of regulation on risk and return," Economics Letters, Elsevier, vol. 228(C).
    • Handle: RePEc:eee:ecolet:v:228:y:2023:i:c:s0165176523001799
    DOI: 10.1016/j.econlet.2023.111154
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    More about this item

    Keywords

    Asset pricing; Regulations; RegData; Market entry barriers;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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