Nic Francis* and Paul A Grout
*Europe Economics
This paper is concerned with the extent that possible changes in regulatory policy feed through into stock market perceptions. It assesses the impact of potential policy changes from price cap to profit sharing regulation in the UK. The approach employs a difference in difference analysis comparing a treatment sample of 19 regulated companies with a control sample of 21 companies. Since the aternative to the existing regulatory regime was a shift to profit sharing, theory predicts that the beta during the period of policy uncertainty should fall for the regulated sample and either be zero or slightly positive for the control sample. These effects are confirmed. An effect separate from the above is noted towards the end of the sample period. Here the average beta of the control sample, which is close to unity elsewhere, falls. This change is also reflected in shifts in the beta of the regulated sample. We attribute this to the 'internet effect'.
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