The Effect of Regulatory Rulings on Cash Flow Volatility and Firm Risk

Abstract

The purpose of this study is to extend prior research of Goel and Thakor (2014), and Morris (2012), who had conducted preliminary analysis of the effect of major financial regulatory reform. Whereas these studies were limited in that they assessed only one year and focused on singular regulatory issues, this study assess three major financial regulatory mandates over the past two decades, namely; Regulation FD, Sarbanes-Oxley, and Dodd-Frank. In addition, an analysis is made of the effects of these regulatory rulings for five quarters after passage. Analysis is conducted on both cash flow volatility, and risk measures in assessing predictive value of security returns after passage of such regulation. Findings indicate that after passage of major financial regulations, the majority of firms in the sample, for each regulatory sample group, have an increase in both cash flow volatility and overall firm risk, expressed through beta. For each of the three regulatory sample groups which have below average betas and cash flow volatility measures, the information content of earnings for these firms contains significant security return predictive value. For each of the three regulatory sample groups which have above average betas and cash flow volatility measures, the information content of earnings for these firms contains insignificant security return predictive value