Regulatory Reform, Industrial Change, and Expected Profitability of Low-Income Financial Service Providers : The Effects of Regulatory Events in the 2007-2014 Period

Payday lending, pawn lending, and other alternative financial services experienced rapid growth in the two decades up until the most recent financial crisis. Immediately before and since that time, these businesses have confronted increasing regulatory pressure both at the state and federal levels. This study considers the impacts of these changes over the previous seven years through two methods of inquiry. The study presents evidence on the changing nature of the industry during this period. The study then uses standard event study methods to consider different regulations, judicial findings, and other important announcements have affected the expected profitability of these businesses as measured by the performance of their share prices. Evidence suggests that the regulatory events of 2008 had a negative and significant effect on the return to publicly traded firms in the payday lending industry, and with the exception of 2009 South Carolina law, most other state level regulatory changes appear to have little predictable effect. The impacts at the state level appear connected to the number of stores operated by firms in those states; however, in the case of Arkansas and Delaware legislation, statistically significant effects were found even though the firms considered in this study had little or no presence in these states, perhaps indicating that regulatory events affect the broader sentiment about these firms, irrespective of the direct short-term profit effects of such changes. At the federal level, the recess appointment of Richard Cordray had robust, largely consistent, and negative effect on the excess returns of publicly traded firms in this industry