The consequences of regulatory reform in emerging countries: the special case of real estate regulation in India

We examine the effect of the passage of the 2016 Real estate regulation and development act on real estate firms in India. We use the regulatory intervention as an exogenous shock and find an adverse stock price reaction, which we attribute to the increased cost of compliance, cost of external financing, and additional monitoring imposed on the firms. Further analyses reveal that firms with higher operating cash flows and a higher proportion of independent directors sustain lower valuation losses. In our post-regulation analysis, we find that firms suffer from declines in operating profit and indulge in earnings management. The effect is more prevalent for firms with higher agency costs (cash holding) and wider business affiliations. Considering that sweeping regulatory changes are relatively infrequent, our findings shed new light on how firms adjust to shifts in regulatory regimes.