Strategic Responses to Regulatory Threat in the Credit Card Market
48 Pages Posted: 16 Mar 2002
Date Written: February 2002
Abstract
In November 1991, federal lawmakers threatened to place a binding cap on credit card interest rates. I find that credit card rates declined following the regulatory threat, more so for larger and more politically visible credit card issuers. A set of stock market event studies reveals that interest rate cuts announced after the threat led to positive abnormal returns, both for announcing issuers and their rivals. This pattern does not exist for similar rate cuts made outside the period of regulatory threat. The results suggest that firms may experience private benefits to price-cutting when doing so mitigates regulatory threat, and spillover benefits when another firm cuts prices in order to ease regulatory threat.
JEL Classification: L1, L5, L51
Suggested Citation: Suggested Citation
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