Studying Firm-Specific Effects of Regulation with Stock Market Data: An Application to Oil Price Regulation

Regulations are often introduced and reformed in response to unanticipated changes in market forces. In late 1973, for example, OPEC quadrupled the world price of oil and U.S. policy makers responded by imposing oil price regulation. Such events pose a fundamental problem of interpretation for studies that use stock prices to identify the economic effects of regulation. What portion of the capital gains or losses experienced by investors in regulated firms is due to regulation and what portion is due to unanticipated economic events? To answer these questions we use microeconomic theory to derive hypotheses about how the capital gains and losses created by OPEC pricing and U.S. regulatory policies are related to the underlying characteristics of petroleum firms. We test the hypotheses by including a model of firm-specific abnormal returns in the standard market models of common stock returns earned by investors in petroleum firms. The results indicate the U.S. oil production and refiner access to price-controlled crude oil were sources of capital gains and that U.S. and foreign refining were sources of capital losses.