Anticipatory effects around proposed regulation: Evidence from Basel III

Abstract

Regulation is often proposed, developed, and finalized over a lengthy rulemaking period
prior to its adoption. We examine the period over which banking authorities discussed,
adopted, and implemented Basel III to understand how firms respond to proposed regulation.
We find evidence to suggest that affected banks not only lobbied rule makers against it, but
that they also made strategic financial reporting changes and altered their business models in
ways that reduced their exposure to the proposed rule prior to rule makers finalizing the
regulation. Further, our results indicate a sequential response, with banks responding through
lobbying and strategic financial reporting prior to making business model changes. These
findings highlight the interplay among firms’ financial reporting, business model, 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.

Keywords: Regulation, Anticipatory Effects, Fair Value, Financial Reporting, Basel III, Event Study, Research Design

JEL Classification: G14, G21, G28, M41, M48