Anticipated vs Realized Benefits: Can Event Studies be used to Predict the Impact of New Regulations
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Anticipated vs Realized Benefits: Can Event Studies be used to Predict the Impact of New Regulations Kara M. Reynolds Department of Economics, American University, 4400 Massachusetts Avenue, NW, Washington, DC 20016, USA. E-mail: [email protected]
Economists use event studies to evaluate the impact of new regulations before there are enough data to empirically estimate the effects. This research investigates how accurately event studies and financial markets predict the benefits associated with a new law. Specifically, I utilize a change in US antidumping law known as the Byrd Amendment to compare the benefits predicted by event study methodology with the actual benefits accruing to individual firms under the law. The results illustrate why researchers who utilize event studies should be cautious when interpreting their results as estimates of the true impact of a regulatory change. Eastern Economic Journal (2008) 34, 310–324. doi:10.1057/palgrave.eej.9050036 Keywords: Byrd amendment; antidumping; event study JEL: F13
INTRODUCTION Economists are often asked to evaluate the impact of a new set of regulations on particular industries well before there are enough data to empirically estimate the effects. One method that economists have used to tackle this challenge in the past is the event study, which assumes that in an efficient market security prices fully reflect all available information and adjust immediately to new information.1 Therefore, the degree to which a new policy will impact a given firm should be reflected in the change in the firm’s security price at the time the new policy was first anticipated. Although researchers using event study methodology typically acknowledge the difficulties they face in estimating an event study, few consider the degree to which a well-specified event model can estimate the impact of an event on a firm. For example, many researchers note that it can be difficult to pinpoint the exact date at which the market first anticipates a new policy; thus, the effect of the new policy may already be embedded in the security price prior to the ‘‘event date’’ chosen by the researcher. Fewer researchers question the degree to which markets can correctly anticipate the impact of a new policy on a firm. As Lamdin [2001] notes, ‘‘the standard approach of event studies is to focus on contemporaneous market reaction to news. Whether the ymarket responseywas warranted is rarely questioned.’’ I study in this research whether event studies can provide useful information on the effect of a particular policy change on a firm, given both the difficulty in estimating event studies and the fact that investors typically have extremely limited ability to anticipate the true impact of the policy. In other words, while a well-specified event study may be able to reveal how investors think a policy will impact a firm, these expectations may be poor predictors of the true impact.
Kara M. Reynolds Anticipated vs realized benefits
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A change in US antidumping law enacted in 2000 known as the Byrd
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