Regulation effects on company beta components

This paper introduces a general model to analyze the effects of regulation on company risk. In particular, we consider two determinants of systematic risk: the company’s overall risk and the correlation between the regulated company’s value and the market. Theoretical findings indicate that as regulation gets stricter, the company’s abnormal returns will turn negative, whereas the two systematic risk components will increase, and vice versa. We use event analysis elements and a time-varying beta estimation to verify the regulation impact on risk and returns in the English electricity distribution industry. We find that systematic risk varies significantly during the period considered in our analysis. Furthermore, the analysis points to negative relationships between abnormal returns and both market correlation and overall risk variations.