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Strategic Responses to Regulatory Threat in the Credit Card Market

  • Stango, Victor

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.

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Article provided by University of Chicago Press in its journal Journal of Law and Economics.

Volume (Year): 46 (2003)
Issue (Month): 2 (October)
Pages: 427-52

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Handle: RePEc:ucp:jlawec:y:2003:v:46:i:2:p:427-52
Contact details of provider: Web page: http://www.journals.uchicago.edu/JLE/

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  1. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
  2. Konar, Shameek & Cohen, Mark A., 1997. "Information As Regulation: The Effect of Community Right to Know Laws on Toxic Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 32(1), pages 109-124, January.
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  4. Maxwell, John W & Lyon, Thomas P & Hackett, Steven C, 2000. "Self-Regulation and Social Welfare: The Political Economy of Corporate Environmentalism," Journal of Law and Economics, University of Chicago Press, vol. 43(2), pages 583-617, October.
  5. Victor Stango, 2000. "Competition And Pricing In The Credit Card Market," The Review of Economics and Statistics, MIT Press, vol. 82(3), pages 499-508, August.
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  7. Glazer, Amihai & McMillan, Henry, 1992. "Pricing by the Firm under Regulatory Threat," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 1089-99, August.
  8. Pirrong, Stephen Craig, 1995. "The Self-Regulation of Commodity Exchanges: The Case of Market Manipulation," Journal of Law and Economics, University of Chicago Press, vol. 38(1), pages 141-206, April.
  9. Robin A. Prager, 1989. "Using Stock Price Data to Measure the Effects of Regulation: The Interstate Commerce Act and the Railroad Industry," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 280-290, Summer.
  10. Arora Seema & Cason Timothy N., 1995. "An Experiment in Voluntary Environmental Regulation: Participation in EPA's 33/50 Program," Journal of Environmental Economics and Management, Elsevier, vol. 28(3), pages 271-286, May.
  11. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
  12. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
  13. Salinger, Michael, 1992. "Standard Errors in Event Studies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(01), pages 39-53, March.
  14. Shaffer, Sherrill, 1999. "The Competitive Impact of Disclosure Requirements in the Credit Card Industry," Journal of Regulatory Economics, Springer, vol. 15(2), pages 183-98, March.
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