Effects of Price Regulation on Stock Returns of Publicly Traded Companies in the Healthcare Industry

Abstract

During the 1980s, governmental changes were enacted to suppress the rising costs of healthcare. The primary forms of legislation were the implementation of the Prospective Payment System (PPS), the passage of Deficit Reduction Act and the proposal to shift capital costs to a prospective payment system. The main emphasis of the study is to examine the price reaction of hospital management companies for the above governmental changes. Using an intervention analysis, the findings show that the market reacted negatively at the passage of PPS and the future proposal to implement capital costs on a prospective basis for hospital management companies. In addition, hospital management companies level of risk increased for all the key event dates.