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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2022 Annual Theme: Stakeholder Capitalism
Market-Based Solutions to Vital Economic Issues
Nov 1, 2020

When and how do firms respond to proposed regulation? Evidence from Basel III


We examine the period over which banking authorities discussed, adopted, and implemented Basel III to understand whether, when, and how firms respond to proposed regulation. We find evidence to suggest that the affected banks not only lobbied rule makers against it, but these banks also made strategic financial reporting changes and altered their business models prior to rule makers finalizing the regulation. Further, our results indicate a sequential response, with banks responding through strategic financial reporting prior to making the business model changes targeted by the regulatory proposal. These findings highlight the previously unexplored interplay among financial reporting choices, business model choices, and political choices in response to proposed regulation, and indicate that the appropriate date for an event study may be the regulation’s announcement date rather than its adoption or implementation dates.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals. 

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