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Impact of Regulations on Firm Value: Evidence from the 2016 U.S. Presidential Election

Published online by Cambridge University Press:  18 April 2023

Santanu Kundu
Santanu Kundu*
Affiliation:
Department of Finance, University of Mannheim
*
santanu.kundu@uni-mannheim.de
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Abstract

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Using the 2016 U.S. presidential election result as a shock to the expectations about the future regulatory environment, I find that most regulated firms earned approximately 4% higher cumulative abnormal stock returns than least regulated firms during the first 10 trading days after the election. Exploring economic mechanisms, I find evidence consistent with the explanation that more regulations disproportionately harm high-growth firms and allow incumbent firms to extract rents through lower competition and political favoritism. Stock returns are also followed by a shift in firm fundamentals over 3 years after 2016, consistent with the economic mechanisms.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 33
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

I would like to thank Ran Duchin (the editor) and an anonymous referee for providing invaluable suggestions. I also greatly benefited from the comments of Alexandra Niessen-Ruenzi, Clemens Mueller, Eric Zitzewitz, Ernst Maug, Michael Weber, Stefan Ruenzi, Tobias Etzel, participants at the 2020 Congress of the European Economic Association, and seminar participants at the University of Mannheim and the Luxembourg School of Finance for their helpful comments. I also thank the German Research Foundation (DFG) for providing financial support.

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