Food contaminants and markets: The impact of regulatory changes on security values of food companies

The work looks into the potential impact of new regulations (and related news) on the value of food firms, with a focus on recent regulatory changes on food contaminants, using case studies from the UK. While such an economic assessment poses major challenges, because of the scarcity of publicly available information on the conduct of businesses, there is an alternative route based on event studies on security values. In rough terms, event studies predict future economic impacts by looking at the immediate reaction of financial market after the release of information which may affect the value of selected firms compared to the overall performance of the financial market. We explore the effects of the new EC Regulation 1881/2006 (ECR) and the following adjustment on national regulations for the UK (ENR), considering the stock returns of 31 food companies listed in the London Stock Exchange. We find evidence of some (minor) negative impact of the ENR, but on the whole the EC regulation seems to have non-significant or positive effects. Negative reactions are mainly associated with incomplete news prior to releases of the draft regulations, while official drafts have generated neutral or positive reactions. These results are confirmed by the stochastic intercept model. The stochastic approach performs satisfactorily in terms of detecting dates of abnormal returns. As the new regulations brought little change to the contaminants level, it is not surprising results were mixed. Finally, the scope of event studies is limited to listed food companies, and cannot determine response of small and medium enterprises, which are more likely to suffer the burden of higher compliance costs from stricter food standards.