Review of Industrial Organization 19: 149–164, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
The Effects of Rate Regulation on Mean Returns
and Non-Diversiﬁable Risk: The Case of Cable
Department of Agricultural & Resource Economics, University of California, Davis, Davis, CA
THOMAS W. HAZLETT
American Enterprise Institute, 1150 17th Street, N.W., Washington, D.C. 20036, U.S.A.
American Express Corporation, Phoenix, Arizona 85021, U.S.A.
Abstract. Anticipated effects of rate controls are best observed in abnormal returns in sectors
providing complements and substitutes to the sector targeted for regulation. Further, risk may rise
in response to rate controls, increasing the cost of capital and lowering investment. We examine
stock price movements during events tied to the 1992 Cable Act, which reinstituted price controls on
U.S. cable TV operators. We ﬁnd strong evidence that controls were not anticipated to lower quality-
adjusted cable rates. In addition, the uncertainty of the policy led to substantially increased stock
betas in some sectors.
Key words: Investment, regulation, risk, telecommunications policy.
The issue of regulatory risk has often arisen in the economics literature. Robert
Pindyck (1991), surveying research on government policy uncertainty, noted that
“a major cost of political and economic instability may be its depressing effect on
investment” (ibid., p. 1141). Avinash Dixit (1992) saw a symmetric effect when he
noted that in Japan, “ﬁrms are protected from the downside risk because govern-
ment supports them in various ways, including cartelization to avoid destructive
competition” (ibid., p. 123). This publicly-supplied investment insurance would
raise expected returns and lower volatility, thus inducing ﬁrms to “invest more
aggressively” (ibid.). George Bittlingmayer (1996) notes a long tradition in eco-
This work was partially supported by a grant from the University of California Giannini Founda-
tion, and is based on techniques developed in part under United States Department of Agriculture NRI
grant 94-37400-0967. Additional support was received from the Program on Telecommunications
Policy, Institute of Governmental Affairs, University of California, Davis.