When and how do firms respond to proposed regulation? Evidence from Basel III

We examine the period over which banking authorities discussed, adopted, and implemented Basel III to understand whether, when, and how firms respond to proposed regulation. We find evidence to suggest that the affected banks not only lobbied rule makers against it, but these banks also made strategic financial reporting changes and altered their business models prior to rule makers finalizing the regulation. Further, our results indicate a sequential response, with banks responding through strategic financial reporting prior to making the business model changes targeted by the regulatory proposal. These findings highlight the previously unexplored interplay among financial reporting choices, business model choices, and political choices in response to proposed regulation, and indicate that the appropriate date for an event study may be the regulation's announcement date rather than its adoption or implementation dates