Aldridge uses event study methodology to measure the impact of SEC regulations. She finds that while the volatility of Financial firms drops following new regulations, returns do not appear to change. This finding does not fit with the SEC's stated purpose nor the "existing regulation theories...Stigler (1971), Peltzman (1976), and Becker (1983) theories)".
First off, I really like event studies that focus on volatility changes (In fact I have co-authored two: one with Horan and Peterson that finds implied volatility drops following OPEC meetings and one with Godbey that finds the "implied volatility of Andersen audited firms increased following events detrimental to Andersen's reputation." Thus when I saw Aldridge's new paper I was almost forced to read it ;) It turned out to be an interesting and thought-provoking piece.
The empirical finding of no abnormal return is important. However, I do have some reservations about the interpretation. For instance, Aldridge writes that the Becker view is that financial firms do not want to keep the status quo and reductions of volatility are bad for these firms:
"The existing theories of regulation, to my knowledge, do not explicitly consider volatility changes in response to regulation. Becker (1983, p. 382), however, does discuss tyranny of the status quo, in which the political sector would protect the status quo against many shocks and changes in the private sector. Following this idea, and noting Schwert (1980) who observes that technological shocks, for one, increase volatility, it is fair to conjecture that governmental intervention that lowers volatility is thus bad for the companies subject to the rules."However, I would be more prone to interpret this maintenance of the status quo as good news. As Aldridge writes in the conclusion:
"But, a caveat exists: in finance literature, lower volatility is not necessarily a badNote, that while this is in her conclusion, this is not her conclusion. But maybe it should be :)
thing. In fact, the effect of decrease of volatility on companies is two-fold: 1) positive,
since the reduction in volatility reduces costs of financial distress, for example, and with those, the cost of equity financing for the firms; and 2) negative, since lower volatility entails lower returns to shareholders. While no definitive answer has been presented in the literature, perhaps Becker (1983) status quo is not a tyranny after all."
Aldridge, Irene E., "Do Financial Companies Benefit from SEC Regulation?" (April 23, 2005). http://ssrn.com/abstract=705461