Center for the Study of Energy Markets

Stock prices should reflect sudden changes in companies’ expected profits due to new information about future environmental regulations. We conduct an event study of President George H. Bush’s Clean Air Act Amendment proposal of June 1989, which had surprising aspects. We find that shares of 35 companies owning affected power plants did not noticeably fall in value after the Bush announcement, nor after three preceding events leading to this announcement. Instead, shares increased in value after the announcement. In contrast, stock prices of practically all 12 coal mining companies studied fell after the Bush announcement and after two of the other three events (although significance levels make these results not entirely conclusive). We argue that expected profits of electricity companies did not fall because electricity price regulation and/or inelastic electricity demand allowed cost increases to be passed through to customers.