‘Uninformed’ investors vs. regulators: a dilemma of event studies

This morning I came across a critical argument regarding event studies that attempt to measure the market impact of competition enforcement (in competition policy event studies are often used for events such as mergers and acquisitions, cartels, or regulatory change). The author argued that event studies presume ‘that the instant analysis of uninformed investors is more accurate than the painstaking work of enforcement agencies with access to confidential documents and data’ (Werden (2008) Assessing The Effects Of Antitrust Enforcement In The United States).

Although I have always looked at event studies with a large amount of scepticism, I do not think that the above argument is a particularly valid one. I would analogously use the choice between resorting to market mechanisms as opposed to government intervention. We like market mechanisms as opposed to regulation because it is the result of the instant analysis of market actors, who we believe to be in a better position to make an informed choice, and even a bad choice will be corrected by all the other actors who do not make such a bad choice. Especially, if we contrast this with the decision of a few selected people who act as regulators, there is no doubt as to which one would make a better (at least economically more sensible) choice.

For this reason it is hard to see why the judgement of numerous market actors should be so categorically disfavoured to the result of the investigation of a regulator in event studies.

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