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Regulation Effects on Company Beta Components

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  • Stefano Paleari
  • Renato Redondi

Abstract

This paper introduces a general model to analyse the effects of regulation on company risk. In particular, we consider two determinants of systematic risk: the company's overall risk and the correlation between the regulated company's value and the market. Theoretical findings indicate that, as regulation gets stricter, the company's abnormal returns will turn negative whereas the two systematic risk components will increase, and vice versa. We use event analysis elements and a time‐varying beta estimation to verify the regulation impact on risk and returns in the English electricity distribution industry. We find that systematic risk varies significantly during the period considered in our analysis. Furthermore, the analysis points to negative relationships between abnormal returns and both market correlation and overall risk variations.

Suggested Citation

  • Stefano Paleari & Renato Redondi, 2005. "Regulation Effects on Company Beta Components," Bulletin of Economic Research, Wiley Blackwell, vol. 57(4), pages 317-346, October.
    • Handle: RePEc:bla:buecrs:v:57:y:2005:i:4:p:317-346
    DOI: 10.1111/j.0307-3378.2005.00227.x
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    References listed on IDEAS

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    3. Frédéric Cherbonnier & Christian Gollier, 2022. "Risk-adjusted Social Discount Rates," Post-Print hal-04012977, HAL.

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