Impact of regulatory announcements on systemic risk in the Indian telecom sector

Abstract

Purpose Post 1991, given the advent of liberalization and economic reforms, the Indian telecom sector witnessed a remarkable growth in terms of subscriber base and reduced competitive tariff among the service providers. The purpose of this paper is to estimate the impact of regulatory announcements on systemic risk among the Indian telecom firms. Design/methodology/approach This study employed a two-step methodology to measure the impact of regulatory announcements on systemic risk. In the first step, CAPM along with the Kalman filter was used to estimate the daily β (systemic risk). In the second step, event study methodology was used to assess the impact of regulatory announcements on daily β derived from the first step. Findings The results of this study indicate that regulatory announcements did impact systemic risk among telecom firms. The study also found that regulatory announcements either increased or decreased systemic risk, depending upon the type of regulatory announcements. Further, this study estimated the market-perceived regulatory risk premiums for individual telecom firms. Research limitations/implications The regulatory risk premium was either positive or negative, depending upon the different types of regulatory announcements for the telecom sector firms. Thus, this study contributes to the theory of literature by testing the buffering hypothesis in the context of Indian telecom firms. Practical implications The study findings will be useful for investors and policy-makers to estimate the regulatory risk premium as and when there is an anticipated regulatory announcement in the Indian telecom sector. Originality/value This is one of the first research studies in exploring regulatory risk among the Indian telecom firms. The research findings indicate that regulatory risk does exist in the telecom firms of India.