Return Dynamics of Reporting Regulation

Abstract

This study examines how regulatory design and uncertainty jointly shape return dynamics of reporting regulation. Using a stacked difference-in-differences design centered on the events of European Union’s (EU’s) reporting regulations and directives for the period 2000 to 2022, I find no systematic directional effect on firm value on average. However, cross-sectional analyses reveal substantial heterogeneity. The resolution of regulatory uncertainty generates a significant positive return in the first quarter following regulatory events that dissipates thereafter and is increasing in the degree of ex ante uncertainty. By contrast, complex regulatory design features such as scope and content changes are priced only in the second quarter, consistent with investors requiring time to extract firm value implications from complex regulatory language. Easily extractable features such as the implementation time horizon are priced as of the first quarter. Overall, the results indicate that regulatory uncertainty and regulatory design are empirically separable channels operating on distinct timelines.