An event study of the effects of regulatory changes on the food industry

Abstract

Purpose The purpose of this paper is to examine the effects of China’s Food Safety Law on its food industry. Design/methodology/approach First, an event study is employed to investigate the impact of regulatory changes on the food industry. Then the authors examine the association between the magnitude of cumulative abnormal returns (CARs) and firm characteristics in a cross-sectional regression framework. Findings The results suggest that the announcements of some important events during the legislative process do affect the investors’ expectations. Further analysis shows that some sub-industries, especially the dairy industry, underperform the others around the enforcement date of the Food Safety Law, indicating that investors expect more costs of compliance for the sub-industries with lower levels of food safety. Moreover, CARs are found to be positively correlated with firm size, implying that larger firms may benefit more from this food legislative reform than small ones. Practical implications Measuring the impact of regulatory changes on food producers and investors by stock market response could help regulators assess the effectiveness of regulation and amend the law accordingly. Originality/value Previous studies seldom empirically examine the effect of Food Safety Laws on China’s food industry and this study attempts to fill this gap, which contributes to extending the understanding of the impact of legislative reform or regulatory changes on related industries.